What is the RIIO-ED2 price control and why are the draft business plans important?

Britain’s electricity distribution network companies have just submitted their draft business plans to the energy regulator, outlining what they plan to deliver between 2023 and 2028.

This five year period is known as RIIO-ED2 and is part of the framework in which network companies are regulated by the government’s regulator, Ofgem.

This period is critical as network companies look to build a strong foundation to meet new demands and unlock Net Zero for customers and communities across the country.

What are price controls and why do we need them?

Britain’s electricity network companies own and operate the infrastructure such as cables, substations and transformers, that keep power flowing to homes and businesses across Britain.

Great Britain is split into 14 electricity distribution areas (known as ‘licence areas’) which are each operated by one of six companies (known as an electricity network operator).

Each electricity network operator is responsible for employing people and investing and maintaining the electricity infrastructure in their area.

As there is no other competition in those areas, the electricity networks are known as ‘regulated monopolies’. For that reason, Ofgem, as the regulator, sets price controls for the network companies. This regulates exactly how much each company can spend and on what. It also ensures  companies invest in things like innovation, customer service and looking after vulnerable customers.

The price controls are, in effect, network companies’ contracts with Ofgem. It is through this framework that Ofgem scrutinises and approves spending and investment plans, making sure that investments provide value for customers and that network companies deliver their performance targets and their commitments outlined in their business plans.

Price controls outline what network companies must deliver and how much revenue they can earn. Electricity networks recover revenues from their charges to energy suppliers who in turn pass these costs through to customers through energy bills.

What is RIIO-ED2?

Ofgem devised RIIO, a performance-based model designed to encourage network companies to put stakeholders at the heart of decision-making, innovating and delivering a low-carbon energy system, all while investing efficiently to deliver value for customers.

RIIO stands for: Revenue = Incentives + Innovation + Outputs

ED2 stands for: Electricity Distribution 2

For Britain’s local electricity network companies, their current price control period (ED1) runs from 2015-2023. ED2 will run from 2023-2028.

What is a business plan?

They are a series of documents in which network companies set out to Ofgem, in detail, their commitments to customers including performance targets, planned investment and expenditure, along with how much revenue they can earn and how much customers will pay.

Business plans are co-created with network companies’ stakeholders and customers who provide detailed feedback on what they expect the companies to deliver for them. Given the highly diverse needs of customers who are spread across the country, listening to the views of local people, businesses and community groups is critical to making sure that networks can provide the best possible service.

Have network companies provided a good service for customers so far during RIIO-ED1?

Network companies have provided customers with an excellent service as well as been at the heart of delivering a long-term, Net Zero future:

• The electricity networks have never been greener – well over 25% of all Britain’s power is connected to local distribution networks, most of it renewables
• The number of power cuts has fallen by a fifth, while the average length of interruptions has fallen by 15% to just over 30 minutes
• Customer satisfaction levels for the electricity networks are averaging 90%
• Since the start of RIIO-ED1 in 2015, network companies’ Business Carbon Footprint (excluding losses and contractors) has reduced by over 49%
• Britain’s electricity networks are recognised across the world for being the smartest, most innovative and most flexible – with up to 3GW flexibility expected to be tendered in 2021
• Britain is ranked 8^th in the world by the World Bank, ahead of countries like the USA and France, for the procedures, time and cost to get connected to the network, and the reliability of the electricity supply and the transparency of tariffs

What happens next?

The draft business plans will be scrutinised by Ofgem and the RIIO-2 Challenge Group. Final drafts of the business plans are submitted to Ofgem on 1 December, so customers and stakeholders still have an opportunity to engage and share their views.