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Ofgem outlines plans for RIIO-ED2 promising investment without bill increases

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Ofgem

Ofgem has announced its plans for the RIIO-ED2 price control period, with the energy regulator promising major investment without impacting consumer’s pockets. 

The five-year RIIO-ED2 price control period will begin in 2023 and run until 2028, with big plans to boost grid capacity, improve customer service and resilience to prevent power outages, and prepare for the future of a greener, cheaper grid. However, all these plans will require major investment, with Ofgem outlining £20.9 billion in investment. 

Despite the large amount of investment required, Ofgem understands the sensitivity consumers will have to any bill increases. Thus, it’s promising in the next control period that bills won’t increase to fund the investment, instead distribution network operators will have to work diligently to find efficiency savings. Additionally, investors have been told to expect lower returns. 

While the plan outlined by Ofgem is just a draft, with the final plans to be published in December this year, as it stands, distribution network operators will stand to receive less than they have outlined in their business plans. In fact, on average, Ofgem plans to offer around 17% less to the levels of baseline funding requested, with businesses needing to make 1.2% per year of efficiency savings.

Ofgem still plans for distribution network operators to make significant improvements to the grid, however. In fact, it wants consumers to gain more control over how much energy they can save through improved access to data and more regularly updated prices for peak and off-peak demand. Additionally, the DNOs will be expected to boost levels of reliability and system resilience to avoid outages during extreme weather events. 

It’s expected that DNOs will still meet the challenge of building the regional branches of the smarter, greener, more flexible grids and ensure the speedy connection of the growing low carbon technologies required to hit government net zero targets. 

It’s those low carbon technologies that will be a priority in the next price control period for Ofgem, with DNOs expected to speed up how long it takes to make a connection. Currently large-scale renewable assets have a lengthy wait on their hands, but already DNOs are making progress on improving their connection times. WPD has committed to approving new domestic EV chargers and heat pumps on the same day or the next day after the implementation of new processes.

To make way for these new connections, Ofgem will make available £2.7 billion of upfront funding to boost grid capacity. 

Jonathan Brearley, Chief Executive of Ofgem, noted, “Ofgem’s job is to ensure energy networks have achievable and affordable plans that will attract the investment needed for a more resilient energy network and achieve the government’s net zero ambition at the least cost to the consumer.

“These are challenging times, and this is the path out of relying on expensive and polluting imported fossil fuels and moving to a home-grown energy system, that exploits the best of modern technology to level out demand and reduce costs for consumers.

“We’re determined to get the best possible deal for consumers and the proposals we’ve published today will mean that substantial additional investment can be made to deliver net zero without placing any further pressure on bills.

“We’re confident that the five-year vision we’ve outlined will help build the world class energy infrastructure needed to connect consumers to reliable, cleaner energy at an affordable price.”

Industry reaction

Naturally, the draft proposals will present a challenge for distribution network operators.

Simon Ede, Vice President in Charles River Associates’ energy practice, commented, “RIIO-ED2 marks a tougher than hoped for settlement for distribution companies as Ofgem seeks to balance the need for large new investments with a heightened sensitivity on customer bills and complaints of excess profits in the past. Beyond the headlines, however, RIIO-ED2 continues to mark the focus of the regulator Ofgem on improving the distribution grids which are a vital component in the energy system given the move to a more decentralised, renewable and smart energy world.

“Whilst the draft sum is still below what the 14 DNOs asked for, it is a recognition of the investments required. Having read the draft submissions form several of the DNOs, it’s clear that digitalisation of the grids is a key trend to better use the assets currently in use. This means software in tandem with smart devices will become more important down to secondary substations and beyond to the customer.

“The £2.7bn of upfront funding is a clear sign that grid resilience is a key priority in the short term and capacity additions required for the EV uptake and general electrification e.g. Heat Pump rollouts require both funding, planning and last but not least a significant increase in skilled labour when it comes to installation and maintenance.”

Basil Scarsella, Chief Executive of UK Power Networks, added, “We welcome today’s draft determination which challenges us to ensure that our network is able to accommodate the transition to a net zero economy at the lowest overall cost to customers and support those most vulnerable. We believe that we have an ambitious business plan, to deliver a 15% real terms reduction in our part of the energy bill, while enabling increasing numbers of Electric Vehicles and heat pumps ensuring nobody is left behind in the energy transition.

“There are still a number of details to resolve, such as the design of uncertainty mechanisms and the additional investment associated with Ofgem’s proposed access and charging reforms, so that we are able to invest at a pace to match the journey to net zero that our customers and communities wish to take. We look forward to working constructively with Ofgem to finalise these details and bring our plan to fruition.”

Sanjay Neogi, Head of UK and Europe at Enzen, concluded, “Today’s Ofgem announcement is welcome news to the industry and customers alike, with almost £3 billion of funding available to increase grid capacity and over £20 billion in total to develop cleaner, more resilient grids for future generations.

“We can all see the strain that high prices are placing on households, so the regulator’s commitment not to increase energy prices as a result offers important reassurance to consumers.

“The question for the UK utilities industry, and DNOs in particular, is how we maximise this opportunity to achieve smarter networks that are efficient, sustainable and equipped to deliver net zero, as well as being highly customer-focused. This will require long-term planning, strategic vision and creative collaboration within the industry, with a focus on applying best practice data, digitalisation and cybersecurity measures that develop the sustainable grids of the future.”

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