Utility Week

UTILITY WEEK | NOVEMBER 2022 | 13 Regulation ment (including in Scotland and Wales given their remit on heat). Apart from the obvious point that the direction for heat decarbonisation is still unclear, the letter o ers no suggestion about what that means for GD3 – and the ideas that Ofgem • oats based on the challenges in trans- mission simply don't read across to gas. In terms of the future direction, they suggest there are equally credible scenarios of "steady demand" or "declining demand" – which is an odd framing of the challenges ahead. The big question is what scenarios should the gas distribu- tion networks (GDNs) be planning for in terms of the role of hydrogen. The lesson from ED2 is that you can't sim- ply leave it to the networks to pick their own scenario. Uncomfortable as it is, the regulator ultimately has to specify a scenario against which to allow baseline fund- ing (and for benchmarking) with clear mechanisms for • exing the plan in the light of di erent outcomes. As a part of this process, Ofgem needs to force the GDNs to start to articulate what a closure of parts of the gas network would look like – not just the hydro- gen future they would like to see. Clearly, safety has to be maintained while there are any customers still con- nected to the network but you cannot have the last few customers picking up the tab for the whole network. And if hydrogen is part of the solution for domestic heat, what actually does that involve and what is the cost? If there is a lesson from transmission it is the need to look beyond the ' ve-year price control window to start to form a longer-term view of the implications of di erent 2050 pathways for gas. Electricity distribution Finally, for electricity distribution it is hard to think about ED3 while ED2 is still being ' nalised. But at some level the issues that have been key to ED2 – the distri- bution system operator role and the balance between reinforcement and • exibility – will be the same going forward but in spades. Capturing the learning from the current process will provide pointers to the changes needed for ED3. In each case the problem isn't the regulatory design per se but being clear on the outputs that matter and how to design the incentives to deliver them – and how to make the process more • exible to cope with the uncertainties. The one question that Ofgem doesn't seem to be ask- ing is whether it should be looking to align the timings for the di erent price controls. The idea has been • oated before as a way to encourage whole systems thinking but rejected because it creates resourcing problems for the Ofgem team. But it would at least allow a period for proper re• ection before the next cycle, which it doesn't have with the current overlapping controls (and inevita- ble CMA appeals). Of course, the Forth Bridge repainting problem was eventually solved back in 2011 when Network Rail found new techniques and products that meant it won't need to be re-painted for at least 25 years. Ofgem isn't going to be able to pull o that trick but some fresh thinking, focused in the right direction, is clearly required. Maxine Frerk, director at Grid Edge Policy, and Sustainability First associate T he open letter from Ofgem director Akshay Kaul poses the challenge that the current price con- trol process "may not be the most appropriate model for the energy system we need to build". Kaul cites the energy transition and the need for whole system transformation as areas where the current price control framework could come under strain. While highlighting the successes of the RIIO framework in delivering investment, service improve- ments and driving innovation, he says this model works best in "relatively forecastable environments in which the actions of one regulated company have few knock-on e ects for other companies in the sector". He says: "The central question for this review is whether it continues to be practical and proportion- ate to follow periodic processes across the full remit of company activity when wider system challenges indicate a growing proportion of investment activity that requires decisions to be made in a faster and more coordinated manner?" Kaul sets out four examples of how the regulatory framework could develop, including adaptation of the RIIO process. The other variants cited are: • An alternative ex-ante incentive regime, where the control is set in advance, but is based on a simpler target to improve operating ež ciency, for example based on a longer-term productivity incentive that is reviewed only as and when necessary. • A model involving greater user/stakeholder participation, for example negotiated settlements with customer representatives or with a body such as the¡Future Systems Operator. • An ex-post regime, where allowances are set based on a pre-determined rate of return, subject to e ective operational delivery. Kaul points out that an alternative approach to price reviews could allow Ofgem and networks to "re-orientate the focus of regulation towards forward- looking considerations, including enhancement projects and whole-system optimisation". However, he stresses that the a ordability of any changes for billpayers would have to be factored in and urges respondents to identify ways in which these alternatives could be implanted with signi' cant costs. Comment James Wallin Editor What is Ofgem considering?

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