Energy consumers could face bill hikes of up to £43 a year from 2026 to fund the future decommissioning of the gas network.
The scenario is mooted in a consultation on Ofgem’s methodology for the RIIO3 price controls for gas and electricity transmission networks, which warns that failing to begin smoothing out the costs now could increase the burden on those customers remaining on gas in the future.
Steve McMahon, Ofgem’s interim director for network price controls, used the consultation to issue a public plea to government for clarity on the future of the gas grid, stressing that “time is of the essence as the status quo is not sustainable”. He added it was vital to “nail down in the next 18 months how we regulate network assets amidst these strategic uncertainties, particularly around potential repurposing or decommissioning the grid”.
Government is due to make a decision on the future role of hydrogen in home heating in 2026, just as RIIO3 comes into effect. Ofgem says that under any outcome it is unlikely there will be large-scale systematic changes before 2031, when the price control ends. However, the document discusses the potential for dealing with some decommissioning costs within the period, potentially through uncertainty mechanisms. It also addresses the issue that future costs could end up being borne by a dwindling number of gas customers.
Gas-related regulatory asset value (RAV) is expected to be around £26 billion at the start of RIIO3. This sum has to be paid back to investors through depreciation, on the basis of an asset life of 45 years. Without any further policy changes this would be repaid through consumer bills.
Ofgem has modelled the impact of “smoothing” this depreciation over the intervening years to 2050. Under its first scenario domestic gas bills would rise by approximately £35 per annum, equivalent to 30% of the network charge. However, this would still result in a RAV of £3 billion by 2050. To completely eradicate the RAV by 2050 would require bill hikes of £43 (or 37% of the network charge) a year.
The regulator highlights that its policy is based on promoting fairness between current and future customers and that billpayers today are not asked to contribute any more than is necessary.
The document says: “We recognise that the macro challenges, and potential tools for addressing those challenges….. could place considerable upwards pressure on consumer bills from the start of the RIIO-3 period. This may be necessary, and consistent, with our principal statutory objective to protect the interests of existing and future consumers, which will imminently include a net zero duty. We will maintain a close view on bill impact throughout the price control setting process.”
Wider points from the consultation
On electricity transmission, the document reiterates the regulator’s desire to build on the Accelerated Strategic Transmission Investment (ASTI) programme created during RIIO2. This fast-track process for major infrastructure projects will see automatic funding for early work on projects highlighted as necessary by the future system operator (FSO). For smaller investments, Ofgem is proposing a “suite of up-front investment and uncertainty mechanisms”.
The consultation repeatedly stresses the need for the sharing of high-quality data and mentions the need for a Minimum Viable Product to enable data sharing in the context of the price control.
The consultation also proposes a new resilience re-opener for all sectors, which could adjust allowances for companies asked to undertake unplanned activities by the FSO or government.
Ofgem accepts that fresh equity will be needed to deliver the plans outlined by the electricity transmission operators and so plans to develop the notion of investability to “better understand whether the allowed return on equity is sufficient to retain and attract the equity capital that the sector requires”. The regulator says this “may involve pulling a combination of existing regulatory levers as well as new tools being developed”.
McMahon said: “We’re driving forward the biggest transformation of the electricity grid in decades, working with government, investors, and industry. We’re knocking down all the barriers with a new approach in planning the system, targeting investment where we need it, when we need it. This means we can expand the network more strategically to better anticipate future demands and connecting new power onto the grid as quickly as possible.”