Ofgem not to hold review of power distribution price control

Ofgem has decided against holding a mid-period review of the current ‘Revenue=Incentives+Innovation+Outputs’ (RIIO) price control for electricity distribution (ED1).

The regulator considered widening the scope of any review to cover overall network returns but concluded that the resulting damage to investor confidence could increase financing costs for networks by up to £3.2 billion over the following price control period – more than offsetting any short-term benefits.

The decision follows the conclusion of a consultation which Ofgem began in December. At the time, the regulator said it was considering three options for a potential mid-period review.

The first was to limit the scope of the review to policy-driven changes to outputs and the introduction of new outputs to meet the needs of consumers and network users.

The second was to extend the scope to cover changes to specific projects, again driven by policy. Ofgem said it only identified one issue which would have been covered – changes to the government’s rail electrification programme announced in July last year.

The final option was to extend the remit even further to cover “financial and incentive performance and design”.

In the decision document published today (30 April), Ofgem revealed that it had settled on the first option, with the regulator not identifying any issues which fitted within this scope and therefore hasn’t held a mid-period review.

Ofgem ruled out the third option on the basis it could “undermine regulatory confidence and weaken incentives on DNOs to perform efficiently. This could result in increased costs, offsetting any short-term benefits, which would ultimately be borne by consumers”.

According to Ofgem’s impact assessment, resetting incentive targets and reducing forecast underspends would cut network revenues by £682 million between 2019/20 and 2022/23, delivering a net benefit to consumers of £322 million.

However, the document also states that the resulting damage to investor confidence could increase financing costs for networks by between £316 million and £3,161 million over the RIIO2 price controls.

Ofgem noted it is still able to claw back underspends from DNOs through the close out process at the end of the RIIO ED1 price control.

Ofgem executive director for systems and networks Jonathan Brearley believes that the regulation will ensure that consumers continue to share in any savings the companies make in the remainder of the price controls.

“We will continue to monitor their performance and we have powers to make adjustments to their revenue if we find that targets have not been met, once the price control finishes,” he said.

“We would also welcome moves by other DNOs to voluntarily refund consumers, particularly if a change in circumstances means they have surplus funding that is no longer needed.”

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