Ofgem overhauls distribution network price controls

Ofgem is overhauling its price control regime to encourage distribution companies to invest the £32 billion over the next decade which the regulator says is required in the power distribution network.

The new price control model, called Revenue=Incentives+Innovation+Outputs (RIIO), is intended to reward network operators which “innovate and invest efficiently” – for which read, investments that don’t result in massive price spikes for consumers – and punish those companies whose investments “perform badly for consumers”.

Fast track price controls and higher returns will be introduced for companies which innovate, deliver good service and produce well-evidenced plans setting out how they will invest efficiently for the future.

Poorly performing companies will face much more intrusive regulation and will face lower returns, warns Ofgem.

Ofgem accepts that investment will mean consumer energy prices have to rise, but to prevent short-term under-investment the RIIO model will run in eight-year phases, replacing the five-year phases of the old price-capped retail price index (RPI-X) model.

“If Britain’s energy networks are going to meet the challenge of delivering a low-carbon economy then we need them to have innovation in their DNA,” said Ofgem’s chief executive Alistair Buchanan in a statement. “To bring about this change Ofgem is seeking to make regulation ‘smarter’ by placing more emphasis on financial incentives to deliver efficient innovation and investment over a longer timescale.”

“RIIO regulation will protect consumers by rewarding those companies that innovate and invest efficiently, but will punish those companies which perform badly for consumers with lower returns on their investment,” he added.

Financing will be more transparent under RIIO, Ofgem promises, providing more clarity and predictability for companies and investors. Ofgem’s proposals will be subject to transitional arrangements which will be agreed for the individual price controls.

Network customers will also get a greater say for in setting out what network companies need to deliver, for example, renewable developers might want faster connections.

Under RIIO there is also the option of giving new network companies a greater role in delivering large-scale projects which do not delay delivery. This could open up new sources of finance and encourage innovation.

The initiative will also see expansion of the current low carbon networks fund to encourage greater innovation across gas and electricity networks.