Ofgem has proposed to revert to a five-year price control period for energy network companies, replacing the eight-year period introduced in 2013 with the initiation of RIIO.
In a consultation launched today (7 March) the regulator argued the step would allow better investment planning in a “rapidly changing” sector and avoid significant imbalances arising between anticipated and actual returns in the period.
Setting out its case for altering the price control time-scale, Ofgem said: “The uncertainty surrounding network activity in the future, and even within the next 5-10 years, means it is extremely difficult to predict the allowances necessary for a range of different activities.
“Our experience with RIIO1 suggests that it may not be possible to anticipate all of the areas where this will arise.”
As a result, the regulator concluded: “We may not be able to put in place a complete set of uncertainty mechanisms. We think that this risk is too high to justify retaining the current arrangements.”
While its proposal to revert to a five-year price control – as existed under the previous regulatory regime, DPCR – is the favoured course of action, the regulator also left the door open to an even shorter price control.
Ofgem said networks could argue for the retention of current eight-year allowance arrangements for particular activities, projects or programmes where they felt a longer time-scale would support greater innovation or cost efficiency. However, the regulator emphasized that network applications for these special arrangements would need to put forward a “compelling case”.
Elsewhere, Ofgem’s RIIO2 framework proposals included tougher requirements for companies’ business plans, which it said could deliver savings of more than £5 billion to customers over five years.
This would be the equivalent of about £15 – £25 per year on the dual fuel household bill for customers who pay for the network through their energy bills, the regulator said.
The proposals are expected to result in a “significantly lower” range of returns for investors, including a cost of equity range of between 3 per cent and 5 per cent – the lowest rate ever proposed for energy network price controls in Britain.
Jonathan Brearley, Ofgem’s senior partner for networks, said: “The energy sector is rapidly changing and consumers must be confident they continue to get good value for money for the services the networks deliver.
“Ofgem’s stable regulatory regime allows companies to attract investment from around the world on behalf of consumers in Great Britain at the lowest cost. We will capitalise on this by getting network companies to work harder to deliver better value for consumers in the next price controls. This will mean lower costs for consumers of £15 – £25 per year on bills and lower returns for companies.”
Ofgem said it can drive forward a tougher regulatory framework for the next price control because of “a stable, predictable and low risk regulatory regime”. It said consumers will benefit from “high levels of investment and innovation at the lowest cost”.
Responding to Ofgem’s proposals David Smith, chief executive of Energy Networks Association (ENA), said: “Energy networks are the nerve-centre of a smarter, cleaner energy market, responsible for delivering a range of exciting new services for our homes, businesses and communities. Balanced regulation is fundamental to delivering these and the price control system should evolve to suit the changing needs of consumers.”
He urged Ofgem to ensure RIIO2 delivers this through a foundation on the “principles of transparency and stability” in order to “provide predictability for investors, innovators and consumers alike.”
Meanwhile Citizens Advice, which had previously called for robust action to control shareholder returns from networks investments, said the RIIO2 proposals represent “a major step forward” and urged the regulator to hold “its nerve” on proposals for creating a fairer returns regime.
The organisation claimed that last year it revealed energy network companies were on course to make £7.5 billion in “unjustified profits”.
Gillian Guy, chief executive of Citizens Advice, said: “The outcome of this consultation will be the acid test for Ofgem. It’s crucial that the regulator holds its nerve and sees through these changes.
“Curbing the ability of energy network companies to make excessive profits, limiting the price control to five years, and ensuring a greater voice for consumers are all measures that should take us closer to a towards an energy market that genuinely works for consumers.”
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.