RIIO2 framework consultation

IGEM response 

View the full response here

Executive summary

The gas and electricity networks are essential to the functioning of society and our economy. The integration of these networks over the coming years is crucial to helping deliver the whole systems energy system of the future. We believe that the overall package of recommendations needs to address this area more holistically in order to achieve the full and effective delivery of benefits to energy consumers.

Generally, we support the headline principles including many of the proposals in the consultation document and the objectives that Ofgem is trying to achieve. In particular we welcome the appreciation that gas networks will play a critical role during the energy transition.

However, we express some - concerns with the overall package of recommendations and would also question some of the rationale and decision made that have resulted in these.

As it stands the RIIO-2 package will result in a significant reduction to networks cost allowances and other revenues with a potential to significantly reduce their ability to fund their core regulatory obligations. A key issue we would highlight is that it would appear Ofgem intends to ensure that the level of rewards available to networks during RIIO-2 will be lower than ever before. We are, therefore, concerned that some of the proposals seek to address perceived issues of the current price control period. The proposals also look to limit and lower network returns in the short term. We believe these should conversely be designed to enable and incentivise the investment and innovation required to facilitate the required continued transformation of the energy sector - not just the RIIO-2 period but also beyond. We await to see how this is reflected in the networks business plans and the potential impact on services to customers over the RIIO 2 period.

We are broadly supportive of the overarching approach of moving to three key outcome themes and agree with the three broad headings. We would question as to whether value for money should be included within these themes as opposed to being part of the business plan incentives.

Within a shorter 5 year price control period there must also be a fair balance between customer benefit and network reward for delivering the stakeholder led outcomes. There is currently an annual totex sharing mechanism and to constrain network rewards further by changing Outputs targets annually (dynamic targets), we think would lead to an unbalanced risk and reward outcome for networks over a shorter 5 year period.