Ofgem has started the process of setting prices controls for the gas and electricity transmission and distribution network companies for the period after April 2021. This is called the “Revenue = Incentives + Innovation + Outputs” or RIIO.
This is the second time that Ofgem has used this framework (hence RIIO-2) and it’s a long-term process with final proposals not expected until December 2020. Any new regime will apply to the gas distribution, gas transmission and electricity transmission networks from April 2021. Though the electricity distribution networks are not due to be reset until April 2023, it is expected that any developments at this stage will be rolled over.
In the framework document, Ofgem identifies issues from the previous price control. It believes that the returns under the current price control are too high, the eight year duration is too long and the revenue incentives too complicated. Also, the business plan incentives were largely ignored. Ofgem has proposed to address these deficiencies in a number of ways.
The biggest impact on network charges will be the desire to reduce returns. This in turn would lower the percentage allowances given for financing costs and equity return rates. Innovation and efficiency incentives will be more targeted, with competition in the provision of system infrastructure in the distribution networks. There will also be a simplification of the existing number of incentives, with a greater reliance on indexing costs. This will ensure that the networks don’t gain windfall benefits from lower than expected running costs.
Ofgem will also shorten the price control to five years. This means it can consider the expected rapid change in network use and technology. There will also be a requirement for customer engagement groups and an independent RIIO-2 challenge group. This is intended to challenge the companies’ business plans as well as Ofgem’s overall management. Ofgem expects to formally consult in December 2018 on the proposed methodologies to be used for each sector.
The framework document can be found here
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