Ofgem has proposed to penalise gas and electricity networks by more than £140 million based on the poor cost and quality of their business plans for the RIIO2 price controls starting in April 2021.
Director of network price controls Akshay Kaul said their failure to provide sufficient detail and clarity contributed to the regulator’s decision to disallow £8.4 billion of requested expenditure.
Under the new business plan incentive (BPI) being introduced for RIIO2, Ofgem will apply rewards or penalties worth up to 2 per cent of networks’ total expenditure allowance based on value for money and the quality of the information provided.
In its draft determinations for the electricity transmission and gas sectors, the regulator proposed to apply penalties to nearly all of the companies examined. The only exceptions are Wales and West Utilities, for which it has proposed neither a reward nor a penalty, and Northern Gas Networks, which is set to receive a reward of £1.6 million.
National Grid Electricity Transmission and the transmission arm of Scottish and Southern Electricity Networks are both facing their maximum possible penalties of £66.6 million and £32.2 million respectively.
Proposed rewards and penalties
“Our proposals are about £8.4 billion less than the companies’ submissions, and there are really three main reasons for this,” Kaul explained in a media call earlier this morning (9 July).
“First, we are putting quite a tough efficiency challenge on the companies on how they run and finance themselves so the efficiency targets are more stretching and that is one big element of the reduction.
“The second is that in a number of cases the companies did not make the case for investing now. The justification was quite weak, the scope of the projects was unclear, and so we have moved to elements of that expenditure from the baseline – that is the upfront spending commitment – into uncertainty mechanisms so funding can be provided when the need is clear.”
“And then in the third very big area, particularly on the transmission side, we have taken out costs where companies simply did not make the case for spending on their asset replacement programmes.”
“To be blunt about it,” he added, “we received from some companies very partial, incomplete information on their asset replacement programmes so we have had to do the best with the information that we had and that’s one big reason why our numbers are so much lower than some of those companies’.
“However, we are very conscious that asset health is a very important aspect of network reliability and safety and so we are actively encouraging those companies to think about this carefully and try and improve the quality the evidence that supports those spending bids.”
Kaul gave a breakdown of the disallowed costs: “Of the £8.4 billion that is the gap between the companies and bids and our proposals, £1.6 billion of that is this move from baseline to uncertainty mechanisms. About £3.7 billion is where we have made the volume reductions in terms of asset management proposals not being justified, and about £3.1 billion is the efficiency challenge for the companies to be more efficient in how they run themselves.”