Five years would be a better length for the RIIO2 price control period because of the amount of uncertainty it is likely to contain, according to the outgoing finance director of UK Power Networks.
Richard Roberts told Utility Week having a shorter period “takes some of the risk away from both Ofgem’s and from the network companies’ perspectives. “I think five years is long enough to give a degree of certainty so that the network companies can carry on making the right decisions about what areas to invest in.”
Ofgem published a consultation paper setting out its vision for RIIO2 yesterday (7 March). The document included a proposal that the price control period should be dropped down from its current eight years to five years.
Roberts said when UKPN fed back in a previous consultation Ofgem published on its overall strategy, the network company was out of line with some of the other distribution network operators (DNOs), which called for the eight-year price control to be retained.
Western Power Distribution, for example, argued at the time: “It is very difficult for network companies to innovate and see results in time periods shorter than eight years.”
Roberts, who will retire at the end of March after 18 years at the financial helm of UKPN, said the “tipping point” for electric vehicles is likely to come during the RIIO ED2 price control period – which will run from April 2023. He suggested rapid changes such as this mean a shorter period may be more appropriate.
In its consultation document Ofgem suggested if an eight-year price control were to remain, the scope for a mid-point review should be expanded.
Roberts said this was not a surprise. “Whether went for an eight-year one with more scope at the four-year point or a five-year one, there’s not a lot of difference. I think both of those would be something that we could live with. When we started thinking about it internally, we thought: it’s actually better off saying why don’t we just go back to the five-year one.”
Ofgem also proposed potential new backstop mechanisms to “ensure fair returns”, including a hard cap and floor.
Roberts agreed with this mechanism, provided it is “sensibly set” and “genuinely leaves an incentive” to drive performance and ensure companies make a reasonable return for their owners.
Network stakeholders have until 2 May to respond to Ofgem’s RIIO2 framework consultation. Ofgem will finalise the framework for setting the next price controls this summer.
Companies will be required to submit their business plans by autumn 2019, while Ofgem’s final view on price control allowances will be published by the end of 2020.