Utility Week

18 | AUGUST 2021 | UTILITY WEEK Policy & Regulation RIIO-ED2: Interview N orthern Powergrid is urging Ofgem to return to a shorter asset life for new investments by electricity distribution networks to ensure inter-generational equal- ity and prevent a future rise in energy bills. Speaking to Utility Week following the publication of its dra• ED2 business plan, the company's then policy and markets director, Patrick Erwin, also accused the regulator of becoming "politicised" and "behaving in a way that could be trying to get the right headline rather than the right outcome." (As Utility Week went to press, the company announced his departure). Erwin also said that the "jury's out" on the leadership of the regulator. Following privatisation in 1990, exist- ing network assets were depreciated over a period of between 10 and 15 years, while new assets were depreciated over 40 years at "We'd like the confidence of seeing the regulator be less obviously political." Patrick Erwin, FORMER POLICY AND MARKETS DIRECTOR, NORTHERN POWERGRID a rate of 3 per cent over the first two decades and then 2 per cent over the following 20 years. To prevent a sudden drop in rev- enues once the pre-privatisation assets were fully paid off, Ofgem subsequently moved to a 20-year asset life with linear depreciation. However, the regulator has been transition- ing to a 45-year asset life for new invest- ments over the current RIIO price controls ending in 2023 for electricity distribution. Existing assets at the start of the regulatory period retained a 20-year asset life. Justifying its decision back in 2011, Ofgem said the longer depreciation period was more reflective of the actual economic lives of network assets and would avoid the kind of "cliff edge" situation that the 20-year asset life was introduced to address. Erwin called for Ofgem to "look again" at the issue: "In ED1, Ofgem moved from 20 to 45-year regulatory depreciation and that had the effect of suppressing bills. "But effectively what it means is custom- ers are paying more in the long term, and while they're paying less now, future cus- tomers are paying a lot more. We think that's a crazy thing to do in a world where we're trying to deploy a whole load of extra capital for decarbonisation." Erwin said a 45-year asset life will result in the regulatory asset value (Rav) for elec- tricity distribution networks (DNOs) rising to at least double what it would otherwise have been, increasing overall costs to consumers by hundreds of millions of pounds. "The longer period of time customers are borrowing money for, the more they pay. It is just like taking out a longer mortgage," he said. "That just feels wrong to us both in terms of inter-generational equality and financing. You're letting the network get very expensive in the future and that will make financing even more difficult." Erwin said the transition to a 45-year asset life will also result in a drop in income for DNOs over the medium term as invest- ments for decarbonisation swell but pay- outs from depreciation initially decrease. He said Ofgem would therefore be forced to raise allowed returns on equity for a period to fulfil its duty to maintain the financeabil- ity of DNOs. In the financial annex to its business plan, Northern Powergrid says this would create "enormous scope for public and polli- cal pressure on the regime", making the sec- tor less attractive to investors and raising the cost of equity. The company says a 25-year asset life would be more appropriate. Erwin dismissed Ofgem's prior argument that the depreciation schedule for invest- ments should reflect the economic lives of

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