Scottish and Southern Electricity Networks (SSEN) has described Ofgem’s draft determinations for the RIIO ED2 price controls as “tough and stretching”, after seeing the largest proportional decrease in its total expenditure (totex) allowances.
In its business plan, the distribution network operator (DNO) requested around £4,232 million of totex allowances for the five-year price controls beginning in April 2023, which the regulator reduced by around £946 million – or 22.4% – to £3,286 million.
DNOs collectively requested £25.2 billion of totex allowances in their business plans submitted to Ofgem in December. The regulator said its own modelling of the plans put the figure at £23.2 billion, representing an 8% reduction.
Ofgem then applied demand-driven reductions of roughly £0.7 billion (3%) to align the plans with its common scenario for meeting the 2050 net zero target. It said the decision to base funding on a centralised scenario reflects concerns over insufficient justification for DNOs’ scenarios and assumed levels of demand.
The regulator said this will ensure consumers are not exposed to unnecessary costs, noting that DNOs will be able to unlock extra funding through uncertainty mechanisms if further needs materialise during the course of the price controls.
It additionally applied downward adjustments of £0.3 billion (1%) and £1.3 billion (5%) to reflect the catch-up and ongoing efficiency challenges to give a final totex figure of £20.9 billion. This equates to a 14% increase in annual expenditure when compared to the current price controls.
Ofgem said it includes £2.7 billion of upfront net zero investment, representing a 90% increase in annual load-related expenditure compared to the current regulatory period.
Although SSEN saw the largest reduction in totex on a proportional basis, the greatest decrease in terms of pounds was to Western Power Distribution’s totex allowance, which fell by around £1,327 million – or 19.2% – to £5,581 million.
The smallest proportional reduction was to UK Power Networks’ totex allowances, which dropped by £609 million – or 11.1% – to £4,854 million.
| Distribution network operator | Submitted Totex | Proposed Totex | Difference | Difference (%) |
| Electricity North West | £2,015m | £1,640m | £375m | 18.6% |
| Northern Powergrid | £3,229m | £2,650m | £580m | 18.0% |
| Western Power Distribution | £6,907m | £5,581m | £1,327m | 19.2% |
| UK Power Networks | £5,462m | £4,854m | £609m | 11.1% |
| SP Energy Networks | £3,397m | £2,928m | £469m | 13.8% |
| Scottish and Southern Electricity Networks | £4,232m | £3,286m | £946m | 22.4% |
| Total | £25,244m | £20,939m | £4,305m | 17.1% |
Responding to the draft determinations in a statement, SSEN said: “Ofgem’s initial determination is tough and stretching, and while it represents an increase of 18% on SSEN Distribution’s equivalent allowances in RIIO ED1 and recognises the innovation proposed through additional Customer Value Propositions, work is required to ensure the final settlement fully reflects customer and stakeholder needs.
“This includes further refinement to properly allow for the necessary delivery of improvements in infrastructure and the deployment of technologies required to reach net zero and build network resilience in the context of climate change. SSEN Distribution also notes the proposed allowed cost of capital which it will continue to review against the context of prevailing market conditions.”
Basil Scarsella, chief executive of UK Power Networks, said: “We welcome today’s draft determination which challenges us to ensure that our network is able to accommodate the transition to a net zero economy at the lowest overall cost to customers and support those most vulnerable.
“We believe that we have an ambitious business plan to deliver a 15% real terms reduction in our part of the energy bill, while enabling increasing numbers of electric vehicles and heat pumps ensuring nobody is left behind in the energy transition.”
He continued: “There are still a number of details to resolve, such as the design of uncertainty mechanisms and the additional investment associated with Ofgem’s proposed access and charging reforms, so that we are able to invest at a pace to match the journey to net zero that our customers and communities wish to take.
“We look forward to working constructively with Ofgem to finalise these details and bring our plan to fruition.”
Note: The figures presented in this article include some rounding errors due to the combination of spending allowances for DNOs with multiple licence areas.