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NETWORK / 9 / JUNE 2017 r i g h t r o a d t o r i i o 2 RIIO hasn't got everything right, but it's undoubtedly on the right road, says Maxine Frerk, former senior partner at Ofgem. Ofgem will shortly kick off the second round of RIIO price controls covering electricity and gas transmission and gas distribution. RIIO is the new energy price control regime, with revenue based on incentives for innovation and outputs (the R=I+I+O formula that gives it its name). This early phase of RIIO2 will shape Ofgem's approach to price controls for all the networks, including electricity distribution, which isn't formally in scope. Now is the time to engage. While the initial open letter should be – as its name suggests – open, it will reveal whether Ofgem wants to change its approach or build on what exists. It's always tempting for someone new to come in and want to leave their mark by developing a new regime. And superficially it can seem there is plenty of scope to do better. But RIIO is one part of the regulatory regime that doesn't need fundamental overhaul to cope with the challenges of the energy transition. The root and branch review that led to RIIO anticipated the low-carbon shift and its challenges. What Ofgem has done on price controls is a role model internationally as all regulators look at how to encourage alternatives to investment in copper and drive a strong customer focus and greater innovation. It also stood up well in the appeals to the Competition and Markets Authority (CMA) by Centrica and by Northern Powergrid on RIIO-ED1. There is still plenty of room for improvement – but it's in the detail. The questions I would be asking are: Is eight years too long in a fast-changing world? How do you encourage transmission and distribution integration if the controls are run separately on different timelines? Do customers get a fair share of any outperformance by the companies? Can indexation be used to avoid windfall gains (or losses) from changes in real wages or the cost of equity? How do you cope with the transmission companies where there is limited scope for benchmarking? Could users play a greater role in determining what is required following the model of constructive engagement used in airports? How do you cope with the risks of gas networks not being needed in a future of decarbonised heat? Moving to shorter asset lives is a natural response, but was shown in the RIIO-ED1 appeal to create new issues. How does Ofgem respond to the one substantive criticism by the CMA about the need for greater transparency on the basis for certain decisions so that suppliers and consumer groups can more readily engage? So there is plenty for the regulator to get its teeth into, but let's not throw the baby out with the bathwater. The essence of RIIO – the focus on incentives, innovation, outputs and greater consumer and stakeholder engagement – has been hugely successful. Ofgem should make clear in its open letter that the essence of RIIO is here to stay. while also reducing constraint payments by up to £80 million over the same period. Similarly, UK Power Networks has deployed new 'self-healing' technology across its high-voltage network in London, the South East and East Anglia to drastically reduce the impact of power cuts on its network. Using GE's Automated Power Restoration System, the network is able to quickly identify the presence and location of faults on electricity cables and to remotely operate switches to restore power to healthy parts of the network within minutes, and without needing to send an engineer straight out to site. Steve White, UKPN's head of network operations and control, says innovation such as this will be key in meeting regulatory demands. "This new technology positions us to meet the UK's new power regulations and equips us with the advanced electricity control management capabilities we need," he says. For Maxine Frerk, who was instrumental in implementing the RIIO arrangements in her former role as a senior partner at Ofgem, those projects and a range of others being carried out by networks support the framework's aims. In particular, and especially when compared to other international regulations, she points to the implementation of totex as incentivising networks to look beyond simply putting new assets in the ground. "Networks are, I think, all actually looking more at those smart solutions to how they manage and control their networks," says Frerk, now at Grid Edge Policy. "That's about having the remote monitoring so they know actually what's happening and managing in a more intelligent way as opposed to just building in extra capacity." It is far too early to draw any substantial conclusions about the effectiveness of the regulations. Clear indications as to value for money and driving innovation will be available only a"er the completion of the first cycle at the very earliest. And there are already clear issues of contention, with charities coming out in criticism at the levels of profit already being returned to the networks through the arrangements. However, in as much as they give any indication to date, the suggestions are that at least in the case of pushing the networks to think differently about how they go about their business, there are early signs of success. N Improved operational flexibility Improved safety Reduced constraint payments Reduced substation costs Breakdown of potential benefits of SPEN's Fitness project 45% 7% 22% 1% Reduced carbon costs Source: SP Energy Networks 25%