Why Ofgem’s Mid-Period Review decision matters

“Today’s announcement is good news for consumers because it means they will continue to benefit from network companies delivering investment as cheaply as possible, without distraction.

“It will keep the cost of new infrastructure down through maintaining investor confidence. That is vital for Britain’s homes and businesses as network companies continue to innovate to find new ways to decarbonise our economy and invest to deliver a more efficient, smarter, cleaner energy system.”

--- Energy Networks Association

What has Ofgem announced today?

Ofgem has today announced that it will not be launching a Mid-Period Review (MPR) into the way the price control system for local electricity networks is working. In reaching this decision, they have concluded that RIIO-1 for these networks is working as intended and that they are well-prepared in specific areas like electric vehicles, cybersecurity, new European laws and flood resilience.

Energy Networks Association is pleased with this outcome. In our consultation response to the possibility of a MPR, ENA urged Ofgem to consider the impact that such a review would have on how investors perceive investment in British energy network infrastructure and the impact that would have on consumers’ bills. This investment is vital to not only ensure our energy networks remain safe and reliable, but also as innovative and efficient as possible.

The regulator has confirmed that if there are any concerns about network company outperformance, then these will be addressed through what is called the ‘close-out’ mechanism which is designed to return money to consumers at the end of the price control period if that is the case.

Energy network companies are committed to creating a more efficient, smarter, cleaner energy system and today’s decision sets out the £620m being spent by local electricity network operators to do just that.

Notably, this includes £227m to lay the foundation of Britain’s smart grid, including through ENA’s Open Networks project, which will help keep the cost of running the electricity network down and enable consumers to benefit from a range of new smart energy technologies.

What does it mean?

Energy network companies are regulated through a system of price controls. These define the way the companies manage Britain’s energy network infrastructure and are designed to balance its investment needs with the costs that are charged back to consumers’ energy bills.

Running energy network infrastructure is capital intensive. Our local electricity network operators alone are forecast to invest a total of £25bn in infrastructure across Britain’s communities in this current price control period (2015-23). They have already invested over £6bn since it began in 2015. This investment keeps our lights on and our homes warm, whilst also helping network companies to innovate to prepare the grid for new smart energy technologies like electric vehicles, which local electricity networks will play a pivotal role in delivering.

Because network companies have to invest large sums of money to do their job, the price control system is designed to be as stable as possible to ensure that investors have confidence that it is a safe investment. That will mean they will expect lower returns for their investment and so the costs of that to households and businesses will be as low as possible.

A MPR is a like safety valve – it means that under certain circumstances Ofgem, the energy regulator, can launch a formal review of the way price control is working and, if necessary, make changes.

In December last year, Ofgem launched a public consultation on whether it should launch a Mid-Period Review for the price control for local electricity network operators (called RIIO ED-1) giving respondents’ three options, ranging from a focussed review to a wide ranging, ‘significant’ review of the system.

Ofgem has chosen ‘Option 1’, which would have meant launching a review if it was concerned about developments in a number of specific areas like electric vehicles, cyber-security, new European laws and flood resilience. It has also decided that it doesn’t have concerns about those things, and so there will not be a Mid-Period Review.

Why is it important?

Energy Networks Association has been concerned for some time about the inclusion of a wide ranging review (‘Option 3’) in Ofgem’s December consultation.

As stated above, in our consultation response ENA urged Ofgem to consider the impact that such a review would have on how investors perceive the risks - and therefore the costs - attached to investment in energy network infrastructure in Britain and the impact that would then have on consumers’ energy bills.:

“We urge Ofgem to continue to recognise that regulatory predictability and stability is essential if we are to ensure consumers’ long term interests are at the heart of the decision making process. The RIIO framework has successfully created the conditions for substantial investment in our energy networks with resultant benefits to end consumers and the wider economy and it is more important now than ever that this is continued.

“A stable and predictable regulatory framework is an essential element of an efficient regime that maximises benefits and minimises costs to consumers.”

In February 2018, Britain’s largest local electricity network operator, Western Power Distribution (WPD), warned that the unexpected inclusion of this option had knocked 20% off WPD’s share price. In March, ENA also warned that current investor uncertainty could translate to higher bills for consumers.

In recent months, ENA has criticised research underpinning claims that consumers are ‘missing out’ on money because energy network companies have been performing well against the standards set by Ofgem under the price control, and therefore there should be a wide ranging review.

Ofgem’s decision today is based on the responses it received to its December consultation combined with its independent analysis of the way network companies and the current price control system is performing.

What does it tell us?

Ofgem’s independent impact assessment strongly supports the concerns that ENA raised in its consultation response. If Ofgem had decided to launch a major review, far from saving consumers money it would have cost them as much as £3.1bn due to the impact of investor confidence in energy network investment. This would have not only impacted on network operators’ ability to attract investment maintain the existing system but also undermined their work to prepare electricity networks for the changes of the future.

Of the 18 respondents to the consultation, the majority supported the view that Ofgem should not launch a wide-ranging review. Four respondents supported the Option in some shape or form.

 

 

 


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