Utility Week

UTILITY WEEK | JANUARY 2023 | 9 Electricity distribution "low-hanging fruit" has already been picked. He said the sector is coming up against the "law of diminishing returns", meaning fur- ther improvements will become increasingly expensive to achieve. His comments were echoed by Maxine Frerk, former Ofgem partner and director of Grid Edge Policy, who told Utility Week that "it's not unreasonable to say what we want, and what customers want, is for them to hold their ground". "It's not clear that customers do want to be paying more for better service," she added. "We don't want to let it slip, but it's pretty damn good at the minute". However, referencing her role as an asso- ciate at think-tank Sustainability First, Frerk said "the bit we were always disappointed in is the lack of any financial incentives around the environment", namely reduc- ing energy losses on electricity distribu- tion networks and phasing out the use of sulphur hexafluoride (SF6) – an extremely powerful greenhouse gas – for insulation in switchgear. Frerk said this "sends the wrong signal about the relative importance of that area". She continued: "The only thing the com- panies were talking about having a finan- cial incentive on was their carbon footprint excluding losses." Noting that energy losses "account for well over 90% of their carbon footprint", Frerk said it is not enough to "just have measures that look at whether you've bought EVs or not. But everybody was keen to keep losses out of the picture, both the companies and Ofgem". "Ofgem has bought the companies' line and they are very keen on flexibility and flex- ibility tends to increase losses," she added. "Our argument is that it makes it more important, not less important, to look at losses and do whatever else you can, whereas Ofgem, I think, was worried that by shining a light on losses, it might discourage DNOs from going down the flexibility path, which they see as being the bigger prize." Uncertainty mechanisms The price controls include an "agile pack- age" of 37 common and seven bespoke uncertainty mechanisms, which Ofgem said will "allow investment to adapt quickly to support higher volumes of low-carbon tech- nologies if networks are faced with sharper uptakes in demand for new connections". Boardman said the regulator had to rec- ognise that DNOs face a lot of pressures and the package it has come out with "on the face of it, today, looks pretty reasonable". "The challenge then is, what does it look like tomorrow? Our sense is that some of the problems of today are being kicked down the road a little." He said managing the numerous uncer- tainty mechanisms, "some of which aren't yet defined and understood properly", will be complex. With the price controls begin- ning in April, Boardman said "there's a lot to sort out". "The challenge of distribution networks is actually the low-voltage networks, the domestic side, where an individual project can be completed very quickly in a day, or at relatively low cost, but there are going to be tens of thousands, if not hundreds of thou- sands of these projects," he said. Boardman said the uncertainty mecha- nisms will place administrative burdens on both Ofgem and DNOs, noting that the larger re-openers will "all happen at the same time… That's going to be difficult, not impos- sible, but it needs to be thought through." Frerk said: "The load-related growth has been put at a lowish forecast – and maybe actually since the economy's tightened and the world's collapsed that may well be more realistic anyway – but there is scope for quite a lot more to be pushed through." "They're going to have a full-time job dealing with all of the uncertainty mecha- nisms as they go along," she said, adding that if the automatic volume drivers haven't been calibrated correctly then they could create "perverse incentives". "But," she qualified, "I'm not picking up worries from either side really. It just makes it a lot more complicated. Ofgem's ambi- tion to become more agile tends to make it harder work." Tom Grimwood, insights editor RIIO-ED2 FINAL DETERMINATIONS TOTEX (£MILLI0NS) DNO Business plan Draft determination Final determination FD vs BP Change FD vs DD Change ENW 1,890 1,640 1,720 -170 -9.0% 80 4.9% NPg 3,232 2,650 2,792 -440 -13.6% 142 5.4% NGED 6,893 5,581 5,977 -916 -13.3% 396 7.1% UKPN 5,253 4,854 5,179 -344 -6.2% 325 6.7% SPEN 3,397 2,928 2,951 -446 -13.1% 23 0.8% SSEN 4,241 3,286 3,589 -652 -15.4% 303 9.2% Total 25,176 20,939 22,207 -2,969 -11.8% 1,268 6.1% RIIO-ED2 INCENTIVES Output delivery incentive New or existing Incentive range (return on regulatory equity) Customer satisfaction survey Existing +0.4%/-0.4% Complaints metric Existing 0%/-0.2% Time to connect Existing +0.15%/-0.15% Major connections New 0%/-0.35% Vulnerability New +0.2%/-0.2% DSO New +0.4%/-0.2% Interruptions incentive scheme Existing +1.5%/-2.5% RIIO-ED2 FINAL DETERMINATIONS - ANNUAL TOTEX COMPARISON (£MILLIONS) £1,400 £1,200 £1,000 £800 £600 £400 £200 £0 ENWL NPG NGED UKPN SPEN SSEN RIIO-ED1 latest RIIO-ED2 sumbitted DD FD

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