Ofgem has announced plans to review the level of competition in the market for electricity distribution connections ahead of the RIIO ED2 price controls beginning in April 2023.
It said the outcome of the review will help to determine the extent to which financial incentives are applied to connections services provided by electricity distribution networks and whether changes should be made to the margin they are required to charge customers in some segments.
In a consultation on the proposed review, the regulator outlined some of the steps it has taken to enable competition for electricity distribution connections.
In 2010, Ofgem introduced a regulated margin of 4 per cent for relevant market segments (those in which competition is considered viable) in 2010 to create headroom in the prices charged by distribution network operators (DNOs) to enable new entrants to be able to compete. It then ran a competition test between 2012 and 2014 to establish in which segments in each region there was sufficient competition to allow DNOs to charge an unregulated margin.
Ofgem said the outcome of this test informed the arrangements it put in place for the RIIO ED1 price controls that commenced in 2015. For those segments that failed the test, the regulator applied incentives for DNOs to provide an appropriate level of service. For those that passed, the application of incentives was limited.
As part of its review, Ofgem said it wants to establish whether there are segments that did not pass the competition test and there is no prospect of developing. In instances where this is the case, the regulator said it may want to consider how it can use incentives to ensure customers receive a good service as well as the application of a regulated margin and its value.
It said it also wants to establish whether there are segments which did not pass the test but there is now effective competition, meaning the regulated margin can now be removed.
Ofgem has asked for feedback on the scope and methodology of its proposed review and set 13 August as the deadline for responses. It said it may subsequently undertake a broader review of the connections market to see whether there are any further barriers to the development of competition and whether they are likely to harm consumers.