In the past month we’ve seen Labour’s proposals for nationalisation of the energy networks and we’ve had Ofgem’s decision on the sector methodologies for RIIO2, Each seems to studiously avoid reference to the other but they are inextricably linked.
In its paper Bringing Energy Home, Labour says it is pursuing nationalisation because of excessive profiteering at the expense of investment in infrastructure. This is presented as a natural consequence of companies being in private ownership. But the problem could equally be pitched as a failure of regulation and previous governments in waiting have set their sights on abolition or fundamental reform of the regulator to address such concerns.
It should be the core job of the regulator to ensure that returns are not excessive and that necessary infrastructure is delivered. Would RIIO2 give Labour what it wants? If not, what is still missing?
On the topic of returns Ofgem has taken a visibly tough line, egged on by Citizen’s Advice and others. The latest RIIO2 decision sticks to that tough line while allowing a bit more flexibility in the design of the efficiency incentive so there is still some room for high performing companies to do a bit better than the low base returns. This is good regulatory practice even if it’s less obviously a political crowd-pleaser than Ofgem’s original idea of effectively capping overall industry returns through a process it termed “anchoring”.
On the question of investment, the picture is more complex. From the start of RIIO2, Ofgem has rightly sought to close the loophole that allowed (particularly transmission) companies to promise major investments and then subsequently decide they weren’t needed and trouser the money as an “efficiency saving”. But it’s not clear that this is the problem that politicians are worried about in energy. At local and national level the concern is more often that the networks are prevented by Ofgem from engaging in “anticipatory” investment that leaves renewable projects facing delays in getting connected, uncertainty about EV charging programmes being delivered and city developments allegedly stalled.
Ofgem is rightly wary of giving the green light to investment – to be paid for by customers – that might not be needed. But politicians are worried about the implications for economic growth and wider decarbonisation ambitions for transport and heat. What is needed is a mechanism for government to signal where it thinks that the risk is worth taking on customer bills in the interests of these wider goals. Ofgem seems to have moved slightly in RIIO2, talking about “highly anticipatory” investment but it’s far from clear if companies will be allowed to deliver what elected politicians want in this space.
And although the headlines in Labour’s document are about returns and investment, the party’s solution reveals other concerns relating to the “legitimacy” of these companies – the potential for local democratic control (or at least some influence) and a community-scale vision, concerns about executive pay and dividend payments, equity issues about who pays for wider network reinforcement. RIIO2 touches on some of this agenda with requirements for transparency on executive pay and a push on increased stakeholder engagement (but with some ambivalence about how much weight should be given to, for example, the views of elected city mayors). However – aside from the clear focus on vulnerable customers – these are bit pieces with no overall sense of expectation that the companies should be responding to the broader agenda that is developing around a sustainable licence to operate or the corporation of the future.
Looking across these three strands – returns, investment and wider legitimacy – RIIO2 certainly cannot be seen as providing a full answer to the concerns underlying Labour’s plans for nationalisation.
One answer for politicians who want to respond to these concerns but avoid the huge disruption that would be created by nationalisation is to turn their sights again on Ofgem and its duties, including the scope for government to provide a stronger policy steer through strategic policy statements. The National Infrastructure Commission review of regulation might pick this up.
And for companies concerned about the prospect of nationalisation, the message must be that they should continue to look at how to build their legitimacy, thinking beyond the relatively narrow framework of RIIO2 and listening and responding to what stakeholders more broadly are calling for.
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