Comments on the Open Letter on the RIIO-2 Framework
Submission from Helen Poulter, Catherine Mitchell and Richard Hoggett, Energy Policy Group, University of Exeter
The Energy Policy Group (EPG) of the University of Exeter welcomes the chance to review the Open Letter on the RIIO-2 Framework.
The Open Letter (OL) is part of a group of related documents published on 4 August 2017: the Ofgem Strategy for Regulating the Future Energy System; a joint BEIS / Ofgem plan for a smart, flexible power system with the Government (which resulted from the January 2017 flexibility consultation (see the EPG submission5)); a paper about the direction of travel on proposals to separate the System Operator (SO, again see our submission to that consultation); a launch statement for the Electricity Settlement significant code review; and a launch document for the Targeted Charging Review.
EPG welcomes the fact that Ofgem is trying to bring coherence and integration to some of its regulatory decisions. The scope of the combined papers is very large and very important, and they all impact on each other. However, the descriptions and language within the documents are essentially status quo when it comes to the institutional arrangements of the future energy system. In other words, the document implies that any regulatory changes which occur as a result of these documents, will occur in the same institutional framework as occurs now. Moreover, whilst the RIIO2 Open Letter itself argues for appropriate incentives on network companies, it does not set out (powerful) arguments about why ratchetting up performance based regulation (PBR) with an incentive mechanism might be an essential key to unlock the energy system transformation. We think this is a missed opportunity in both cases.
We are pleased that the Open Letter asks whether 8 year price controls are appropriate – and our view is that they are not, and should be considerably shortened. However, on a more general note, the Open Letter is discussing price controls for 2021, and in the case of distribution, for 2023. Moreover, one of the related documents asks about price control timelines for the transmission system operator. It is vital that RIIO-2 is restructured so that it does provide adequate incentives for innovation and for networks to be operated in a flexible, efficient way which meets customer wishes. If the output of this consultation gets it ‘wrong’, then GB is potentially trapped with a poor regulatory mechanism until 2031.
The carbon budget for the period 2028-2032 is 1,725 mt CO2e, equivalent to a 57% reduction on 1990 levels. In order to meet this budget the networks will not only need to consider heat and power but (following the statement released in July to end all sale of petrol and diesel cars by 2040) increasingly transport.
RIIO as an acronym is fine. This comment paper does not mind there being a RIIO-2. It does argue however that the design of RIIO-2 has to be fundamentally restructured because of its significant weaknesses.
Finally, publishing the related papers in August and one month before the deadline for the RIIO-2 Open Letter is not be the best way to kick – off the consultation on such major issues or to include a wide set of stakeholders.
This comment is set out as follows: the next section (Section 2) provides a general high-level discussion / critique of the GB governance system; RIIO; Section 3 critiques the seemingly piecemeal approach to regulation that appears to be occurring via Ofgem and BEIS; Section 4 argues that performance based regulation (PBR) and network charging are two central, inter-linked sources of revenue for network companies, and the key means to incentivise them to do what society wants of them; Section 5 sets out reasons why GB could learn lessons from other jurisdictions, even if those jurisdictions have different regulatory systems than our own; Section 6 provides a specific example of the problems of RIIO; Section 7 provides a high level critique of RIIO; Section 8 provides high level comments on the Open Letter; Section 9 answers some of the questions within the Open Letter, and Section 10 concludes.
The full submission can be downloaded here: Comments on the Open Letter on the RIIO-2 Framework – submission from EPG Sept 2017