The abundance of uncertainty mechanisms in the RIIO ED2 price controls will leave a lot of work to do during the period for both Ofgem and distribution network operators (DNOs), industry experts have told Utility Week.
In its final determinations issued earlier this month, the regulator said the “agile package” of 37 common and 7 bespoke uncertainty mechanisms will “allow investment to adapt quickly to support higher volumes of low-carbon technologies if networks are faced with sharper uptakes in demand for new connections.”
The common uncertainty mechanisms comprise 4 indexations, 10 passthrough allowances, 3 use-it-or-lose-it allowances, 4 volume drivers and 16 reopeners.
They will allow DNOs to unlock additional funds to the £22.2 billion of totex allowances given upfront approval by Ofgem. The regulator said it has approved £3.1 billion of load-related expenditure, including adjustments to account for incoming changes to network access arrangements following a significant code review (SCR).
Allan Boardman, asset management expert at PA Consulting, said his overall impression of the final determinations is that “Ofgem have been quite astute.” He said the regulator has had to account for a lot of pressures being faced by electricity distribution networks and the package it has come out with “on the face of it, today, looks pretty reasonable.”
“The challenge then is, of course: what does it look like tomorrow? Our sense is that some of the problems of today are being kicked down the road a little.”
He said managing the numerous uncertainty mechanisms, “some of which aren’t yet defined and understood properly,” will be complex. With the price controls beginning in April, Boardman said “there’s a lot to sort out.”
“The challenge of distribution networks is actually the low-voltage networks, the domestic side, where an individual project can be completed very quickly in a day, or at relatively low cost, but there are going to be tens of thousands, if not hundreds of thousands of these projects,” he added.
Boardman said the uncertainty mechanisms will place administrative burdens on both Ofgem and DNOs, noting that the larger re-openers will “all happen at the same time.”
“That’s going to be difficult, not impossible, but it needs to be thought through,” he concluded.
Boardman also noted that Ofgem’s shift from April to a shallow connections charging boundary – one of the outcomes of the network access SCR – will reduce connection charges and spread the costs across the wider customer base. He said this may have created a disincentive to connect in the meantime, with the result that “you might be racking up the last six months’ worth of connection applications to all come in on 1 April.”
Maxine Frerk, former Ofgem partner and director of Grid Edge Policy, expressed similar views.
“The load-related growth has been put at a low-ish forecast – and maybe actually since the economy’s tightened and the world’s collapsed that may well be more realistic anyway – but there is scope for quite a lot more to be pushed through,” she explained.
“They’re going to have a full time job dealing with all of the uncertainty mechanisms as they go along.” She said if the automatic volume drivers haven’t been calibrated correctly then they could create “perverse incentives”.
“But,” she qualified, “I’m not picking up worries from either side really. It just makes it a lot more complicated. Ofgem’s ambition to become more agile tends to make it harder work.”