Submission: RIIO2 Framework Consultation

Ofgem RIIO-2 Framework Consultation

Submission from Helen Poulter, Catherine Mitchell and Richard Lowes

Energy Policy Group, University of Exeter

1. Summary

The University of Exeter Energy Policy Group (EPG) welcomes the opportunity to comment on the RIIO-2 Framework. With this consultation, we feel that Ofgem has missed an opportunity to make the changes to RIIO2, and the wider, matching governance changes that we recommended in our response to the Open Letter[1]. Overall, we still feel that the proposed RIIO2 regulatory mechanism, as set out in the consultation, is still fundamentally flawed and ill-suited to delivering a cost-effective, flexible, sustainable energy system.

In brief, in relation to the consultation six areas (page 3):

We agree that consumers need a stronger voice, but also governance (which we take to mean the combination of public policies, institutions, network rules and incentives, market design, Codes and Licenses, retail policy and customer preferences) has to work together to provide propositions that users want. The responsibility for providing user propositions that users feel comfortable with should not just be within having a stronger voice, they also have to be listened to. Using Challenge Groups is one method of doing this but we would recommend that creating a DER plan (Section 0) will allow customers to better influence how networks will need to adapt in the future. Moreover, we think that desired outputs linked to performance based regulation (PBR) should be included to relate to customer and society public interest goals such as (1) better balance with long-term goals (as opposed to short-term economic); (2) more implementation related to ‘future’ customer wishes, including environmental and low carbon outcomes; (3) ensuring protection of vulnerable users and maintenance of strong public service obligations; and (4) deliverance of more diverse regulated companies.
We are glad that RIIO2 is taking note of the changing ways of using networks. We think that the uncertainty of how networks should develop is overemphasised within the consultation document. We do not think that RIIO2 is set up to either complement active network management, or to capture the value within different distribution areas. Network charging continues to be based on the current top-down, linear costing methodology (Figure 3-1) which is out of step with energy system challenges[2]. We also worry about the language of putting controls in place to protect consumers from the risk of an unexpected future. Far better that regulation is set up to be adaptive, iterative and to capture new opportunities.
We do not think RIIO2 as set out will particularly improve innovation and efficiency or deliver better value to customers.
We agree that the price controls should be simplified – although the extent to which any of your options are actually doing that is debatable.
We do not feel qualified to comment on ensuring fair returns. What we would say, if network companies change their roles and start to manage their networks in new ways, suited to a more sustainable, smart and flexible future, then they deserve a fair return.

We recognise for this response to say that the RIIO2 framework has to be fundamentally rethought if it is to become fit for purpose may seem a little blunt. It seems to us that, whilst the RIIO2 consultation is clearly asking multiple questions and has not yet made many final decisions, its language has limited ambition with respect to innovation, incentives and outputs. We think it should be saying that a smart and flexible energy system which fulfils public interest goals will require certain features – for example, increased flexibility provision, more heat decarbonisation, more interconnection with Europe etc. It follows that a GB governance system, and a regulatory mechanism, which would appropriately deliver those outputs, needs to include certain institutional and costing methodology changes which mean that innovation is inherently supported whilst incentives can be much more easily and adaptively be implemented to deliver desired, and possibly changing, outputs. At root, this requires a regulatory mechanism where performance based regulation is linked to an increasing amount of revenue over time, and that the outputs the PBR is delivering are those related to a user-focused, affordable, public interest, sustainable, smart and flexible energy system. The RIIO2 consultation has not so far done that, but we remain optimistic that the next step will do so.

This response is set out in the following way:

Section 2 gives a brief overview to the EPG Response to the Open Letter. We do not propose repeating ourselves here.
Section 3 provides an overview of our arguments for a more fundamental re-think of energy governance, which RIIO2 would be central to. In brief, it seems to us that Ofgem is trying to take multiple decisions, which together have momentous implications for energy governance in the UK. However, whilst we think is commendable that Ofgem is looking at all these areas, we think that there is insufficient knowledge when taking those decisions; too little discussion or understanding about their implications; and too little ability to adapt to any unforeseen impacts in the future.
Section 4 argues for appropriate timelines, and evidence based decisions.
Section 5 looks at learnings from other jurisdictions.
Section 6 answers the consultation questions.
Section 7 concludes.

The full EPG submission can be downloaded here: Ofgem RIIO2 Framework Consultation – submission from EPG May 2018

[1] http://projects.exeter.ac.uk/igov/comments-on-the-open-letter-on-the-riio-2-framework/

[2] http://projects.exeter.ac.uk/igov/presentation-innovation-and-governance-for-future-energy-systems-what-role-will-distribution-companies-play/