Utility Week

UTILITY WEEK | JANUARY 2021 | 19 Policy & Regulation O fgem has issued its final determina- tions for the RIIO2 price controls beginning in April next year, raising the baseline profit margin for investors in the transmission and gas distribution sec- tors by more than a third of a percentage point over its dra determinations in July. The regulator has increased the allowed return on equity for a notional company geared at 60 per cent from 3.95 per cent in real terms to 4.3 per cent. It said a typical investor could also expect to receive 0.25 per cent in performance incentives to give an overall cost of equity of 4.55 per cent. Ofgem said this still represents a reduc- tion of around 40 per cent on the current regulatory period. Along with improvements in efficiency, the cut to returns is expected to save consumers £2.3 billion. The regulator has also approved an extra £5 billion of upfront spending over the five- year RIIO2 price controls – a fih more than in its dra determinations and bringing the total to £30 billion. It has flagged a further £10 billion of net zero investment that could be approved during the period but says there is no limit on funding so long as there is a good business case. Despite the increase in returns over the dra determinations, Scottish and Southern Electricity Networks (SSEN) says it is "very disappointed" they do not reflect the "robust evidence" available to Ofgem. The company said it had expected the decision to be "at least in line" with the provisional findings of the Competition and Markets Authority in the ongoing appeal of four water companies against their price controls, adding that it will "continue to keep all options open". Ofgem pointed out that its new estimate for the cost of equity is higher than both Ofwat's final determination and the mid- point of the CMA's proposed range, which it gave as 4.09 per cent and 4.37 per cent respectively once adjusted to only cover the network activities of water companies. However, its cost of equity remains below the level proposed by the CMA which, in contrast to Ofgem, opted in favour of "aim- ing up" to 5.08 per cent – "midway between the midpoint and the top of the range" – to avoid what it saw as the asymmetric risk from underinvestment when compared to overcompensation. Ofgem's allowed return on equity is also less than both the midpoint of the CMA's range for the cost of equity and its proposed rate. For a detailed analysis of how the regulator calculated the rates of return see https://utilityweek.co.uk/civil-ser- vice-solution-enough-to-avert-riio2-appeals/ Aer rejecting more than £8 billion of requested expenditure at the dra determi- nation stage, Ofgem has decided to increase totex allowances back up by £4.1 billion. As Utility Week went to press, networks had given little away as to whether they were likely to appeal the final determinations to the CMA. However, with the price control due to start in April 2021 and the CMA not releasing its final redeterminations in water until mid-February, decisions seem likely to go down to the wire. Company/sector Actual and Average yearly Final Average yearly Difference forecast expenditure determination allowance between expenditure (RIIO1 - £m) (RIIO2 - £m) (RIIO2 - £m) yearly (RIIO1 - £m) figures (%) SP Transmission 2286 286 1,213 243 -15 SHET 3793 474 2,160 432 -9 National Grid Electricity Transmission 10244 1,281 5,335 1,067 -17 Electricity Transmission 16323 2,040 8,708 1,742 -15 National Grid Gas Transmission 3212 402 2,010 402 0 Transmission 19535 2,442 10,718 2,144 -12 Cadent 8438 1,055 4,620 924 -12 Northern Gas Networks 1930 241 1,174 235 -3 SGN 4511 564 2,639 528 -6 Wales and West Utilities 1797 225 1,157 231 3 Gas Distribution 16676 2,085 9,590 1,918 -8 Overall Total 36211 4,526 20,308 4,062 -10 Company/sector Requested DraŠ Final Difference Difference allowance determination determination between draŠ between draŠ (£m) (£m) (£m) and final and final determination determination (%) (£m) SP Transmission 1,389 970 1,213 25 243 SHET 2,388 1,609 2,160 34 551 National Grid Electricity Transmission 7,090 3,332 5,335 60 2,003 Electricity Transmission 10,867 5,910 8,708 47 2,798 National Grid Gas Transmission 2,603 1,559 2,010 29 451 Transmission 13,469 7,469 10,718 43 3,249 Cadent 5,317 4,078 4,620 13 542 Northern Gas Networks 1,249 1,083 1,174 8 91 SGN 3,058 2,527 2,639 4 112 Wales and West Utilities 1,182 997 1,157 16 160 Gas Distribution 10,806 8,685 9,590 10 905 Overall Total 24,275 16,154 20,308 26 4,154 through to the totex sharing factors and rewards and penalties for business plans, both of which are determined wholly or partly by the level of confidence Ofgem has in their approved costs. The maximum rewards and penalties under the Business Plan Incentive are also set at plus or minus 2 per cent of baseline totex. Perhaps the most noteworthy change is for SSE's transmission business, which was previously facing a £32.2 million penalty that would have been set at £47.3 million if it were not capped at the lower level. Ofgem has now granted the company a £19.5 mil- lion reward aer drastically reducing the penalty it previously intended to impose due to its level of confidence in the firm's costs. The other company facing the maximum possible penalty at the dra determination stage was National Grid Electricity System Operator, which would have been docked £196.3 million in the absence of the cap. Its penalty has fallen only slightly, from £66.6 million to £65 million, but is now signifi- cantly below its new maximum of £106.7 million. However, its sharing factor – the amount of any over or underspend it keeps – has fallen from 39 per cent to 33 per cent. Scottish Power Transmission, by contrast, saw its sharing factor rise by 10 percent- age points to 49 per cent, while also going from a £15 million penalty to a £3.7 million reward. Tom Grimwood, energy editor

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