Utility Week

UTILITY WEEK | SEPTEMBER 2022 | 27 Regulation On interruptions, Ofgem reminds us how successful financial incentives have been in driving improvements in both the number and duration of interruptions. But it raises a question about whether customers are willing to pay for further improvements. Absent a clear view on that, it has trimmed back the incentive. That may well make sense but it feels like a decision driven by a cost-cutting mindset rather than one informed by any customer evidence or vision. On vulnerability, Ofgem seems to have taken the strange call at this time of crisis of reining back heavily on spend by the DNOs to provide support to those in fuel poverty. In particular, it has ruled out any spend on energy efficiency measures (beyond signposting and advice) on the grounds that this is funded by govern- ment through the Energy Company Obligation and Green Homes Grant. But on the same day the dra„ determina- tions were published, the Climate Change Committee put out its annual progress report criticising government for the lack of funding in this area. UK Power Networks had proposed a significant level of spend to support those in fuel poverty matched by shareholder funding, which Ofgem has rejected. One of their arguments is that this would lead to variations regionally in the level of sup- port. That's true, but perhaps some levelling up might have been possible rather than levelling down? Again, it feels as if this is driven by a cost-cutting mindset rather than a vision for what DNOs should actually do in this space. This is disappointing because Sustainability First had argued that Ofgem and DNOs should make use of the ED2 period to reach a better understanding of what the scope of a DNO role might be in the wider energy efficiency landscape. In a welcome step, Ofgem had previously identified energy efficiency as a theme for this year's Strategic Innovation Fund but it is unclear how that fits with Ofgem's position in ED2. Finally on the companies' environmental impact, this was a major disappointment for Sustainability First. Ofgem had previously proposed a financial incentive linked to an environmental scorecard, which it has now dropped. At one level this makes sense given that what the companies were proposing was very narrow – but Ofgem could have pushed the companies far harder on meeting their environmental targets, including on long- run management of losses and SF6. And it has ignored our arguments for at least a beefed-up reputational incentive with an annual Ofgem report with red-amber- green ratings, for example, rather than leaving it to companies to spin their performance in their annual environmental reports. Ofgem also continues to buy the companies' argu- ments that rising losses are inevitable and not some- thing to worry about – ignoring the substantial report Sustainability First submitted highlighting the rising costs of losses; the range of steps the companies are considering in their losses strategies (which show there are things that could be done); and the flaws in Ofgem's approach to evaluation of such measures (relying on an outdated cost of carbon, for example). Ofgem and the companies argue that with grid decarbonisation the car- bon impact of losses will decline over time. But the point remains – as with all energy efficiency measures – that if we don't manage losses, we will need more generation and more network capacity – adding to the cost of meet- ing net zero. Losses are a whole-system issue that cur- rently no-one seems to own and which Ofgem urgently needs to focus on ahead of the final determinations. Having been there, I know that over the next few months Ofgem will be hunkered down with the compa- nies working through the various criticisms and queries about the benchmarking, and hoping to avoid another CMA appeal. What the companies mainly care about at this stage is how much they will get paid for what they have to do – and perhaps rather less about what they are actually being asked to deliver. But at the end of the day this is at least as important. It's not just about the cost. It's about the vision. Maxine Frerk, director at Grid Edge Policy, and Sustainability First associate Ofgem missed an opportunity to change the conversation on system losses and SF6

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