Ofgem’s Open Letter: Next network price control review process: response

Ofgem, as the energy regulator, plays a key role in developing the regulatory framework to ensure that the energy network companies which transport electricity and gas act in the interests of gas and electricity consumers.

They set price controls for these networks because they are privately owned natural monopolies; they are usually the only service provider in a geographic location.

Since 2013, Ofgem have used a framework to set the price control across each gas and electricity network called RIIO (Revenue = Incentives + Innovation + Outputs). Most recently, the RIIO-2 price controls for electricity and gas transmission and gas distribution companies commenced on 1st April 2021 and will run until March 2026.

The next price control for electricity distribution companies (RIIO-ED2) is currently being finalised and will cover the five-year period from April 2023 to March 2028.

In light of the scale and range of factors affecting the future development of our gas and electricity networks, Ofgem are taking steps to consider the most appropriate regulatory framework for the challenges and  opportunities that lie ahead.

Ofgem seeks feedback on whether there is a strong case for reform to the current approach, and the potential
benefits and costs of any changes. Specifically, they seek views on the following key questions:

  1. Do you have any views on the strategic issues we will face in the development of the
    next price control review process?
  2. Do you have any views on the case for change we have outlined?
  3. Do you have views on whether the changes to the electricity or gas sectors mean we should consider alternatives to the approach taken in the RIIO-2 price control?
  4. Are there any broad frameworks or options that you think we should consider, including variants and alternatives to those we set out?

Key points

Energy Systems Catapult response to this open letter is summaried:

  • Whole-systems approach. Ofgem’s initial analysis suggests greater fragmentation of price controls may be necessary. However, it will be crucial for Ofgem to ensure whole systems thinking across the energy system, and to incentivise innovation to exploit synergies across the system and between energy vectors.
  • Wider strategic alignment. Price controls are a central part of building and maintaining networks for the future but there needs to be close alignment with other complementary areas of reform – including with Climate Change Committee trajectories, as well as the emergence of the Future System Operator, local governance, planning consent, network tariffs / wholesale price signals, etc. This will be crucial for unblocking opportunities for anticipatory investment.
  • Innovation. Need to bolster incentives for developing and disseminating new and improved approaches and technologies – including through retaining/strengthening the Strategic Innovation Fund and Network Innovation Allowance. Positive outcomes from publicly funded innovation project should be widely disseminated and adopted at scale.

Read the Response

Energy Systems Catapult response to Ofgem’s open letter on the next network price control review process

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