The U.K. regulator Ofgem has approved a revised pricing framework for British transmission networks, one meant to avoid sticking consumers with excessive bills while also allowing for sufficient investment to allow the country to achieve its net-zero targets.
On Tuesday, Ofgem revealed a total investment package of at least £40 billion ($53.3 billion) for 2021-2026, with £30 billion of upfront funding available. Additional funding will be released for low-carbon projects presented when the network companies make the business case for it. Those companies have flagged £10 billion worth of such projects so far.
The new investment package is part of Ofgem's second Revenue = Incentives + Innovation + Outputs framework (RIIO-2), set to be implemented in April 2021, which will guide transmission network investments from 2021-2026. It will see network charges in annual bills fall by £10 per household to £159, before increasing to current levels by 2026.
The draft determinations published in July were heavily criticized by the industry, which branded them “perverse.” Those plans set upfront investment at £25 billion and permitted a lower level of return on investment. They also capped the return on equity at 3.95 percent. That figure has now been lifted to 4.3 percent.
National Grid said at the time that weak investment could impact the stability of the system. It and other network companies claimed that it could also make delivering on the U.K.’s net-zero plans a challenge.
Ofgem said at a Tuesday press conference that it had been “disappointed” with the level of detail in the network companies’ business plans for the RIIO-2 period. After more collaboration and 20,000 pages of engineering documentation, the new £30 billion figure was arrived at.
Operators could use recent precedent as basis for an appeal
Great Britain has three transmission companies; National Grid in England and Wales; SSE Networks in northern Scotland; and Scottish Power Energy Networks in southern Scotland. Under the RIIO regulatory construct, first set in place in 2013, their traditional process of earning rates of return on capital investments, the model used by most regulated utilities, is replaced with a system that compensates them on total controllable expenditures, or “totex."
In response to the revised plans, SSE welcomed the increased totex terms but said it still might not be enough.
“Further work is required to assess whether this level of totex is commensurate with delivering the outputs stakeholders demanded and the investment required to deliver [the] government's net-zero targets,” the company said in a statement.
The trio can appeal once a brief consultation period has been cleared. Decisions on whether to accept the changes or appeal them to the Competition and Markets Authority (CMA) are expected in February, leaving two short months for a resolution.
The CMA backed water utilities in a landmark case that consumer watchdog Citizens Advice said would cost billpayers £500 million, by increasing their allowed rate of return by 0.54 percent compared to the rate proposed by the regulator. Citizens Advice has stated that if the precedent set in that case were applied to the RIIO-2 framework, it would add a further £3.2 billion to bills over the five-year life of the framework.
In its response to Tuesday’s publication by Ofgem, SSE said it is “very disappointed” that Ofgem has “not fully reflected the robust evidence — particularly that from the CMA provisional findings of the PR19 water price control appeal.”
Matching grid returns to net-zero ambitions
Last month the U.K. government launched a 10-point plan for a “green industrial revolution.” This included the increase in its offshore wind target from 30 GW to 40 GW by 2030 and the acceleration of the deadline for its phaseout of new gas and diesel vehicle sales from 2040 to 2030.
The strength of these signals toward electrification means the U.K. will see an increase in electricity demand. The U.K. government’s official climate change advisers have modeled a scenario for power in 2050 that would see renewables provide around 57 percent of all generation.
“We all want to decarbonize at the lowest cost, and the RIIO-2 settlement is rightly designed to minimize costs for consumers,” said Rebecca Williams, head of policy and regulation at RenewableUK. “But there’s still a risk that Ofgem is underestimating the scale of much-needed grid investment that needs to happen in the next five years, which could mean delaying or restricting the growth of renewable generation on the system.”
In addition to connecting dozens of gigawatts of offshore wind, that power also needs to be distributed to demand centers. This is where Scotland's two network companies become disproportionately important. A tenth of the U.K. population lives in Scotland, but the country generates 25 percent of the U.K.’s renewable electricity. Efforts are already underway to add two subsea cables from Scotland to England with a potential capacity of 2 GW. A cable running down the west coast has been dogged by delays and poor performance.
In September, environmental law nonprofit ClientEarth told GTM in an email that while Ofgem doesn't have specific authority to consider low-carbon or net-zero needs in its decisions, it can and should make those needs an integral part of its decision-making process.
“Given that Ofgem regulates the second-highest emitting sector of the U.K. economy, this massively impedes the country’s prospects for meeting its targets," Charlotte Hanson, an energy lawyer with ClientEarth, told GTM in an email.
RenewableUK's Williams agreed that Ofgem's latest plans "are still treating net-zero as if it is a future aspiration or even an uncertainty. We’ve been urging Ofgem to put net-zero at the center of every decision it makes, to benefit current and future consumers."
"To ensure that they do this, it is now vitally important that Ofgem’s legal duties and responsibilities are linked more firmly and more specifically to achieving the U.K.’s legally binding net-zero target," she said, "not least because this will achieve decarbonization at the lowest cost to consumers, as renewables are the cheapest sources of new power.”