Source · Select Committees · Business and Trade Committee
Recommendation 46
46
Deferred
Paragraph: 202
RIIO-ED1 regulatory process proved overly generous for distribution network operators' profits.
Conclusion
The RIIO-ED1 process, which set the amount network operators could charge energy bill-payers for making upgrades to the grid over the period 2015–2023, proved overly generous. Distribution Network Operators were able to either build 108 Decarbonisation of the power sector more infrastructure that is rewarded through the Regulated Asset Value, or not spend on that infrastructure and keep a proportion of underspends. Given that technology deployment curves are hard to forecast, we understand Ofgem’s use of uncertainty mechanisms for RIIO-ED2. We will be looking to the regulator to ensure that they better manage risk and that network companies bring forward the required investment. The uncertainty mechanisms will need to be used efficiently, before customers see problems, particularly if the economics of heat pumps or electric vehicles change quickly.
Government response summary AI-generated
The government details the establishment of the Future System Operator (FSO), aiming for it to be operational in 2024 with a duty to promote net zero. It will also create a framework agreement outlining FSO's relationships. This response focuses on the FSO's role rather than Ofgem's management of the RIIO-ED2 process or uncertainty mechanisms for network investment.
Summary of the government's response below — read the verbatim text to verify.
Paragraph Reference:
202
Government Response
Deferred
HM Government · verbatim extract
Deferred
105. In the current electricity distribution network price control RIIO-ED2, Ofgem has proposed baseline funding of £22.2bn, up by more than £1.3bn from its draft determinations, including £3.1bn proposed for network upgrades, supporting the expected uptake in electric vehicles and heat pumps. Ofgem is allowing baseline expenditure, on average across the distribution network companies, 17% higher than in the first price control period RIIO-ED1. 4 https://www.nationalgrideso.com/industry-information/codes/cusc/modifications/cmp376-inclusion-queue- management-process-within-cusc 5 https://cdn.prgloo.com/media/35e96278bc7040f08ed7103df86c23e4.pdf (action 1) 6 https://www.ofgem.gov.uk/sites/default/files/2023–05/Open%20Letter%20Connections%20%28Final%20 16.5.23%29.pdf (Annex D) 7 https://www.nationalgrideso.com/industry-information/connections/connections-reform 8 https://www.energynetworks.org/newsroom/energy-networks-launch-action-plan-to-accelerate-grid- connections 9 https://www.ofgem.gov.uk/sites/default/files/2023–05/Open%20Letter%20Connections%20%28Final%20 16.5.23%29.pdf (page 9) 10 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1148252/ powering-up-britain-energy-security-plan.pdf (page 50) 22 Decarbonisation of the power sector: Government Response 106. Ofgem has made changes designed to increase the flexibility and speed at which contingent funding can be accessed through uncertainty mechanisms, so that companies can get additional funding above baseline quickly when required. Ofgem is consulting on future systems and network regulation to determine if the RIIO framework is fit for purpose, and to investigate possible archetypes for its reform.
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