Ofgem has set out the rules that will shape electricity distribution investment between 2028 and 2033, with distribution network operators set to face tighter scrutiny over how they plan, justify and deliver grid upgrades.
The regulator’s Sector Specific Methodology Decision for ED3 will determine how the five electricity DNOs across Great Britain prepare their business plans for the next price control period. Those plans, which cover 14 regional licence areas, are due to be submitted in December.
This matters because ED3 will land at a crucial point for electrification. By the time the price control begins on April 1, 2028, distribution networks will be expected to support growing demand from EV charging, heat pumps, rooftop solar, battery storage, commercial developments and larger industrial connections.
That will require significant investment in local networks, but Ofgem is making clear that DNOs will need to prove where new capacity is genuinely needed, rather than relying on broad forecasts of future demand.
According to Ofgem, the new framework introduces ‘strict cost of capital rules’ and ‘clear conditions’ on delivery. It said ED3 will use tighter baseline capital rules, stronger cost controls and in-period adjustments, allowing investment to be approved, increased or deferred as demand materialises.
The key question that remains, however, will be whether that framework accelerates grid readiness, or whether tighter approval thresholds risk slowing down reinforcement where demand is already visible.
Build and flex
One of the most important changes is Ofgem’s decision to make ‘build and flex’ the default approach.
Under the model, DNOs will be expected to maximise existing grid capacity through smart and flexible demand management before turning to physical reinforcement. That could include smart EV charging, demand-side response, battery storage and controlled exports to manage constraints more efficiently.
There is logic to that approach. Not every constraint needs to be solved with immediate network build, and flexibility has an increasingly important role to play in making better use of existing assets. However, flexibility cannot become a substitute for reinforcement where capacity is clearly needed.
Steve McMahon, Ofgem Director of Network Price Controls, noted, “Our rulebook strikes a tough but fair balance in expanding grid capacity to meet the demands placed on them.
“It ensures investment is targeted, justified and delivers value for money – that’s why we’re putting strong controls in place to protect consumers from projects that are not delivered on time and on budget.”
McMahon added that Ofgem will approve new investment “only where the strategic need is clear and networks have maximised existing capacity.”
He said this will block ‘unnecessary physical upgrades’ based on speculative forecasts, adding that there is ‘no short cut to securing the investment needed to support electrification’.
Connections under pressure
Connections performance is another major focus of the new methodology, with Ofgem planning stronger rules to speed up connections for low-carbon technologies and major projects.
That includes financial penalties for delays and underperformance, as well as rewards for DNOs that deliver stronger service. Ofgem says this will apply across a wide range of connections, from low-voltage assets such as EV charge points and rooftop solar through to larger housing, commercial and industrial projects.
Grid connection delays have become one of the most persistent barriers to electrification projects, whether that is a depot looking to install charging infrastructure, a commercial site trying to add solar and storage, or a new development waiting on reinforcement.
Ofgem’s framework should give DNOs a clearer set of incentives, but the practical test will be whether those incentives translate into faster approvals, better visibility and more reliable delivery dates.
The need for better forecasts
It’s unsurprising that Ofgem has taken the approach to demand better forecasting in the future – rather than simply relying on speculative buildouts. Take the data centre sector as a prime example. The Government’s own flawed methodology initially assumed a rather low amount of data centres would actually request a grid connection, while Ofgem had a much higher figure. The problem with both of those extremes, however, was that it’s unlikely that every project that has been proposed will actually ever be built.
That’s why it’s important to have better forecasts as to what the demand on the grid will actually entail. That means that DNOs won’t spend unnecessarily on network reinforcement, which in turn will be passed onto consumers through higher energy bills. Those higher energy bills are already a bone of contention for those looking to invest in the UK, with it recently cited as a key reason for OpenAI’s decision to pull out of the Stargate UK project.
Ofgem will publish draft determinations next summer, with final decisions due by the end of 2027. The new ED3 price control will then begin on April 1, 2028.
