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Ofgem RIIO-ED2 consultation response


Citation Gross, R. and Bell. K. Ofgem RIIO-ED2 consultation response. 2020. (none).
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Author(s) Gross, R. and Bell. K.
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Abstract The next electricity distribution price control (RIIO-ED2) covers the period of April 2023 to March 2028. In this response to Ofgems consultation on the methodology, they will use to set the electricity distribution companies income, Keith Bell and Rob Gross respond to questions regarding two aspects: planning of networks to enable net zero; and innovation.

Pathways that are consistent with legislated net zero targets are likely to see highly significant changes to demand for electricity. When these changes will start to take place and how quickly is uncertain, which leads to challenges when setting price controls. Key elements to circumnavigate this will be flexibility and scenario planning.

The need for network reinforcement can be reduced by the appropriate use of flexibility, e.g. in the timing of EV charging. However, the means by which different sources of flexibility might be encouraged and then utilised are still immature and it is not yet clear which will actors prove to be the most significant and efficient in providing services.

Flexibility can only go so far in helping meet power supply needs; at some point, network capacity often proves the most cost-effective means, especially when considering its reliability and lifetime, and the opportunities provided by asset replacement. The triggering of investment in network assets presents an opportunity not just to meet the immediate need or that forecast for the next few years, but to provide for the maximum transfer that can be envisaged throughout the path to net zero. This is likely to be cheapest for consumers over the longer term as the incremental cost of additional electrical capacity is small relative to the total cost of aproject, it avoids the need for repeated interventions, andit saves on the long-term cost of network losses.

Ofgem has noted in the consultation document that some form of scenario planning of investment is likely to be needed. A number of scenarios should be developed that encompass key uncertainties but are consistent across Britain in respect of the whole, multi-vector system, and associated assumptions.

There should be engagement with Local Authorities and other stakeholders to develop regional plans of future energy needs, such as a Local Area Energy Plan. This engagement is important as local, regional, or devolved administration policies as well as different geographies and starting points can drive different actions.

Innovation is a long-term process and uncertainty is inherent to it there is always the potential for unforeseen things to arise. What this means for the energy system is that:

  1. Withinaportfolio of innovations, some will realise the intended benefits, but some will not.
  2. Where benefits are realised for energy users, they will, in general, take time to accumulate.
It should also not be assumed that innovation expenditure in a previous price control period will result in any particular level of reduced cost to consumers in a subsequent period.

Where there is uncertainty about the effect or cost of new practices or technologies on an energy system and its users who ultimately pay but also benefit from innovations that are adopted it is reasonable for those users to share the risk by sharing the cost of resolution of the uncertainties. However, arguments might be made that costs should be shared not by energy system users, i.e. its customers, but by taxpayers, e.g. through funding by UKRI.
A less than perfect set of arrangements for the sharing of costs between different parties should be accepted if that is what is necessary to support R&D capacity, address risks, and drive innovation. Moreover, the amount of network customers money that is being proposed in RIIO-ED2 to support innovation is modest compared with the network companies total expenditure and the benefits that will accrue to customers and society as a whole in the energy system transition.

Good governance and good practice on the part of network licensees is essential to ensure that customers money is used effectively. In particular, we agree with Ofgem that data transparency associated with network innovation projectsneeds to be much improved.

In order that the scope of Network Innovation Allowance (NIA) funding is not set too narrowly, we think it important to have a clear understanding of what a successful energy system transition involves. We include in our response a first draft of a definition and include recommendations for the threshold that projects must meet to be funded.

Summary: The greatest challenges faced by Distribution Network Operators (DNOs) in forming investment plans relate to the gathering and use of information with suitable levels of spatial and temporal detail. Access to smart meter data should help, but innovation will be required to turn data into useful information.

A final observation is that it is important for the UKs economy as a whole that the UK has the capacity to undertake research and development, to innovate, and to generate evidence in order to drive the commercial viability of ideas