UK - Ofgem recommends £32bn network upgrade needed to handle new generation

The UK’s office of gas and electricity markets, otherwise known as Ofgem, recently estimated that over £200 billion needs to be spent in the next 10 years if the UK is to move to a low carbon economy.

Of this, around £32 billion needs to be spent on pipes and wires against an industry worth £43 billion today. This implies an increase in value of 75 per cent – and a doubling of the rate of investment from the previous 20 years.

In order to attract this kind of investment, Ofgem has revamped its regulatory framework to include a new performance based model for price controls, which rewards companies that innovate and run their networks to better. Ofgem estimates that the RIIO model, which stands for Revenue= Incentives+ Innovation+ Outputs, could cut the cost of investment to consumers by £1 billion.

Wind Energy Update speaks to Ofgem to learn more about the scheme.

Wind Energy Update: Why was an overhaul of the existing regime deemed necessary?

Ofgem: The RPI-X approach has served consumers well over the last 20 years. But the challenges facing Britain’s gas and electricity network companies are changing.

In particular, they need to facilitate the move to a low carbon economy whilst maintaining safe and reliable network services at long-term value for money. It is not simply a matter of the network companies doing more.

The way networks are designed, operated, and priced is likely to need to change. In particular, measures to tackle climate change are likely to lead to substantial changes in the way we produce and consume energy.

Meeting these challenges will require companies to manage the uncertainty around what needs to be built on their networks, how and when. It will also require them to think longer term, understand what their customers value, innovate at a level unprecedented in the industry’s recent history, and work with others.

To drive this change in network company behaviour, the regulatory framework also needs to change. RIIO is designed specifically to support and encourage the network companies to meet these new challenges.

Wind Energy Update: How would the new framework benefit on and offshore wind energy generators?

Ofgem: RIIO puts sustainability alongside consumers at the heart of what the network companies do. An important part of the RIIO approach is to look to the companies to take responsibility for developing and justifying a long-term strategy for delivering the network services that their customers value.

To do this they will need to engage effectively with their stakeholders to understand what it is they value. This provides a big opportunity for network users such as offshore/onshore generators to have a big say in deciding what results/outputs companies should deliver during this period.

Once we have agreed what it is that the network companies will deliver for their customers, we will hold them to delivery. We expect to hold the electricity transmission companies to providing timely connection to their network for generators and to providing timely and accessible information to potential connectees. We will shortly be consulting on the exact form of this requirement for the next price control period.

RIIO also puts a lot of emphasis on innovation. In particular, we are introducing an innovation stimulus that will provide partial funding to innovation projects that drive the move towards a low carbon economy. This will be open to all parties. Wind generators will therefore have the opportunity to bid for such funding.

Wind Energy Update: Ofgem says around £32bn is required in transmission upgrades. What kind of incentives does the proposed framework create to encourage this level of investment?

Ofgem: The £32 billion is an estimate and relates to investment across all of Britain’s networks (transmission, electricity distribution and gas distribution). The key point is that RIIO is specifically designed to support and encourage networks to invest efficiently and in a timely manner. It does this by providing a range of strong financial and reputational incentives to deliver what stakeholders want as efficiently as possible.

Wind Energy Update: What advantage does an extension of the price control from five to eight years confer on wind energy developers, network operators and end consumer, respectively?

Ofgem: Moving to an 8-year price control is part of wider changes to encourage longer-term planning. This will make it easier for network companies to invest because they can plan & build new infrastructure over a longer term.

It will also make it more likely that sustainable and efficient delivery will be produced. All users should benefit from efficient delivery of what they need from timely connections to reliable networks.

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