Ofgem has hit back at claims its proposals for the RIIO2 price controls beginning in April 2021 will effectively put net zero plans “in the fridge”, noting that it approved 90 per cent of the investment requested by networks towards this end.
The regulator was responding to comments made to Utility Week recently by Scottish Power chief executive Keith Anderson. Director for network price controls Akshay Kaul wrote in a letter that it was “incorrect and misleading” for Anderson to suggest that £10 billion of the £25 billion of upfront funding proposed by Ofgem had been put into an uncertainty mechanism.
You can read Kaul’s full letter below:
Claims that Ofgem’s investment proposals for the energy sector will put the green recovery at risk are wrong (‘Anderson: Ofgem cost-cutting puts net-zero ambitions ‘in the fridge’’, 17 July). It is misleading and incorrect to say, as Mr Anderson suggests in the article, that £10 billion out of £25 billion has been put into an ‘uncertainty mechanism’.
In our draft determinations, we proposed to approve £25 billion of expenditure upfront. The networks will not have to come back to Ofgem for approval once agreed at final determinations. They will be able to spend the £25 billion straightaway. The £25 billion includes funding 90 per cent of the investment related to net zero targets sought by network companies in their plans, removing only projects that were highly uncertain or unnecessary based on advice from the system operator. As a result, we have allocated over £3 billion of funding for connecting renewables and upgrading the transmission grid.
Network companies did not ask for any additional upfront funding for green investment beyond this because they were unable to identify any ‘shovel-ready’ projects in their plans. Nevertheless, we have identified potential for another £10 billion or more of future green investment, including ambitious projects for powering a motorway charging network, connecting offshore wind in the North Sea and testing the potential for hydrogen-based heating. Companies can bid for this funding once they are ready with sound investment proposals. We are encouraging them to tell us if work on any of these projects can be accelerated to power a green recovery, including within the existing price controls.
It is true that our proposals include a reduction in rates of return for investors to reflect current market conditions (as recommended most recently by the National Audit Office, amongst others). Scare stories of investors fleeing to other countries simply don’t stack up. Regulated networks remain an extremely attractive investment in the current economic climate. Investors are proceeding with investment in the water sector without difficulty for similar returns.
It is also true that we have proposed to reduce company spending by about £8 billion where they did not demonstrate good value for money. These reductions mostly focus on network running and maintenance costs (such as company back-offices or replacing transformers and switchgear), which will have little to no effect on the green recovery or progress towards net zero.
About 50 per cent of the upfront allowances are covered by mechanisms that hold companies to account for delivery and return funding to consumers if the work is not done to the agreed specification or is no longer needed. Although these ‘accountability’ mechanisms are also a kind of uncertainty mechanism, they are entirely separate from the net zero reopeners.
Billions of green energy investment is urgently needed for Britain to achieve its net zero ambitions. We are waiting for network companies to prepare further sound projects for green investment. We stand ready to green-light measures that demonstrate that they bring emissions free energy at the lowest cost to consumers.
Akshay Kaul, director for network price controls, Ofgem
Kaul will be responding to questions on the RIIO2 draft determinations for gas and electricity transmission, gas distribution and the electricity system operator as part Utility Week’s next #AskUsAnything session this coming Friday (24 July). Click here for more details and to add your question to the list.