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RIIO-2 blog series. Change is needed to reflect uncertainty and risk

RIIO-2 blog series. Change is needed to reflect uncertainty and risk

In our second blog, we review Ofgem’s decision to shorten the price review period and explore the rationale and impact this will have on the price review process.  

RIIO-T1 and RIIO-GD1 price controls are due to end in March 2021 with RIIO-ED1 ending in March 2023. Ofgem launched the framework review for RIIO-2 earlier this year which marked the beginning of the consultation process for setting price controls for the network companies running the gas and electricity transmission and distribution networks in the UK. On the 30th June, Ofgem announced the results of the consultation which focussed on the following areas:

  • Strengthening the consumer voice
  • Responding to changes in how networks are used
  • Driving innovation and efficiency
  • Simplifying the price controls
  • Fair returns and financeability 

The main changes as a result of the framework decision are:

  • Confirmation that the default length of the next controls from 2021 will be five years (compared with the current eight years)
  • Ofgem’s plans to deliver savings of over £5bn to consumers
  • There is no update to the 3%-5% cost of equity range (the amount the companies can pay their shareholders) at present
  • Ofgem will extend the scope for opening up high value network upgrades to the benefits of competition across the gas and electricity sectors

One of the core areas of focus in the framework decision and central to RIIO-2 is ‘Responding to changes in how networks are used.’ In this article we will explore what this means and the impact on the business planning process.

How networks are used - minimising risk  

A significant shift in the framework decision for RIIO-2 is the move to a shorter price review period, the default price review length will move from eight years to five years. Mirroring that of the current price review period in the water sector, set by Ofwat.

This is one of the biggest changes to Ofgem’s regulatory business planning structure, it received wide acceptance in the consultation period from network companies and was quoted as being ‘a sensible precaution in a time of high uncertainty’ it was felt to accommodate the need for a nimbler approach to reflect risk and technological changes in the sector.

Ofgem, who hope to promote more proactivity and innovation as part of a five-year price review period, have acknowledged that there will need to be flexibility and they will assess proposals for allowances for some activities to be extended over a longer period of time.

As part of the review, Ofgem announced that they would not be aligning the start date for Electricity Transmission (ET) and Electricity Distribution (ED) in this price review period. The rational being that price controls in individual sectors should not be a barrier for network companies to take actions that lead to improvements elsewhere in the energy system, and that whole system outcomes and collaboration could still be delivered. 

As part of the initial consultation, Ofgem highlighted that network utilisation and investment risk needed to addressed in RIIO-2. The emphasis is on network companies to choose investments that maximise long term value for consumers, highlighting the rapid changes in consumer behaviours and technology and that there could be ‘inefficient investment’ if there is investment to meet long term demands that do not emerge.

Unpicking the regulatory framework, why Explain?

Explain has worked within the utilities sector for two decades, working in contracted partnerships with several of the UK’s biggest and most respected suppliers and distributors. These relationships have allowed Explain to develop an in-depth understanding of the importance of consumer and stakeholder engagement, ensuring we engage with the end user to deliver insights that support and are aligned to business planning.

Why Explain:

  1. Independent: You can be confident that our advice will be impartial, open and focused on delivering robust insight to support business planning throughout RIIO 2
  2. Bespoke solutions: Offering a range of research methodologies from the traditional to the innovative, always focussing on the best approach to deliver robust insights ensuring we engage with the end user   
  3. Business planning experience: With experience of customer and stakeholder engagement in the water and utility sector through RIIO-1, PR09, PR14, and most recently PR19 we are adept at engaging with customer and challenger groups, alongside core customer research to ensure we deliver representative results
  4. Research that unlocks insight: Delivering a range of research solutions through a mix of methodologies to deliver insights including: business planning strategic reviews, stakeholder research, customer research, vulnerable customer research, brand awareness and perceptions and public consultation.

On 4th October 2018, experts from the Explain team are presenting their findings from the Northumbrian Water Innovation Festival at the MRS Utilities Conference. The findings focus on the future of customer engagement in the utilities sector and innovation in the market research sector to future proof and provide solutions to engage with customers.

Contact the team for further information on the services we can provide.