The current process for approving new investments by electricity and gas distribution networks should be replaced with a consumer-led “pathway planning” approach that allows them to respond more rapidly to the latest developments.
In a new report, the consultancy Stonehaven says the current regulatory regime, which relies upon “cumbersome, bureaucratic” re-opener mechanisms to deal with uncertainty, is unsuitable for decarbonising the energy system at pace and will slow down vital upgrades.
The paper, commissioned by the gas distribution network Cadent, says Ofgem has effectively recognised this problem with the introduction of the Accelerated Strategic Transmission Investment programme, which allows electricity transmission investments to be approved outside of the normal price control process.
“But this decision was only taken because the regulator was effectively pressured into taking this one-off action when it became manifest that its existing procedures were too slow,” it notes.
The report says a similar process will not work at the distribution level “where the need for upgrades will be dispersed around the country and where a slow pace of delivery will only become apparent with a rising tide of anger from consumers who find they are unable to upgrade to local carbon heating or switch to an electric vehicle.”
Stonehaven is instead advocating for a “pathway planning” approach, whereby network operators would produce plans to meet a range of branching decarbonisation pathways, each of which would have a corresponding portfolio of investments.
“Rather than having to go back to the regulator for approval for every street-level upgrade, networks should be empowered to invest once certain triggers are reached or evidence becomes available,” the report explains.
“Pathway planning would allow investments in defined stages based on ‘trigger data’ such as the number of electric vehicle chargers or the number of heat pumps installed on a street. This enables us to make investment explicitly dependent on where and when consumers are buying low carbon devices rather than a central direction and helps reduce the risk that a central planner will get it wrong.
“The intent would be to ensure that our network is adapted to the needs and preferences of the public, rather than the other way round.”
Who does what
The report says the pathways would be specified by the Regional Energy Strategic Planners (RESPs) due to be established by the National Energy System Operator when it is launched later this year.
The RESPs would also be responsible for specifying the thresholds for triggering packages of investments and monitoring when they have been reached: “This means that decisions on a class of uncertain investments are explicitly taken out of Ofgem’s hands and instead taken on the basis of a framework determined by the RESPs.
“This route enables consumer preferences to be the dominant force in determining network outcomes; it gives scope to consumers to vote with their wallets,” it adds. “But it can also incorporate non-consumer information. Changes in the cost profiles of key technologies – such as heat pumps, electrolysers, heat network piping and controls – will also affect the probabilities of particular outcomes and can be incorporated into the ongoing assessment undertaken by the RESP.”
Stonehaven says the challenge groups established by Ofgem to scrutinise network operators’ business plans could instead scrutinise RESPs’ pathways and triggers.
Based on these pathways, network operators would develop plans setting out: investments that are common across multiple pathways; the costs of the portfolios of investments associated with each pathway; key dates at which they may have better information about the likelihood of each outcome; and incremental investments that could be made to meet capacity needs in until these decision points are reached.
The report acknowledges that determining appropriate costs across multiple pathways “may represent may represent an increased burden, and so a preferable approach may be determining a set of generic project costs as part of the business planning process rather than seeking to exhaust a potentially vast probability space.”
It continues: “Investments triggered during a price control period would feed back into network charges at the next review of charges, pending a more automatic mechanism. There is no role here for Ofgem to second-guess the RESP’s framework; to do so would defeat the point of the regime.”
Adam Bell, director of policy at Stonehaven, said: “The way we make decisions about our energy networks is not working. We’re already seeing industry not growing because they can’t get power, people who want to go green but can’t get a connection, and considerable uncertainty over the future of boilers in all our homes.
“Instead, we need to start planning our various possible futures properly. If lots of people on a street buy a heat pump, that street should get an upgrade as soon as possible. If lots of businesses want to build new data centres in a particular area, we should build new infrastructure to support that. And if we get to a particular date and people haven’t bought heat pumps, we should convert that area to hydrogen.
“This kind of rapid decision-making is critical not just for net zero, but to restart the economy and get Britain building again.”
The gas question
The report also recommends a mechanism for dealing with investment in gas assets, many of which may ultimately be decommissioned. It says gas assets should be split into one of three categories, depending on how likely it is they will be needed over the long term.
In the first category would be assets that are highly likely be needed in 2050. These should be retained within the Regulatory Asset Value (RAV) of networks and depreciated according to the normal schedule.
In the second category would be assets that may be needed in 2050, depending on cost outcomes and consumer preferences for heating. Investment in these assets should not be added to the RAV but instead added to a new value category of Regulatory Option Value.
These assets would continue to contribute to returns and depreciate over the typical period until their fate is determined. At this point, these assets would either be added to the RAV or put into the third category for assets that are unlikely to be needed in 2050.
Assets in this category would be placed on an accelerated depreciation profile, “potentially as short as ten years.”
The report says gas assets that are not needed cann0t simply be abandoned and must be safely decommissioned, but it would not be appropriate to charge remaining customers for this work: “Government may choose to simply buy non-depreciated assets at their book plus asset value from gas networks or make provision to finance decommissioning and any enduring depreciation costs by issuing decommissioning bonds to pay down the cost of doing so.
“This enables investors to continue to fund critical safety upgrades to gas networks in the confidence that regardless of the outcome at the end of a branching path they can recover their investment.”