Issue link: https://fhpublishing.uberflip.com/i/831507
R IIO was supposed to be a gamechanger, putting a stop to the culture of pouring concrete by encouraging networks to take a long-term, holistic view of their expenditure via the new total expenditure (totex) scheme. As RIIO-T1 and GD2 pass the halfway point, and ED1 finishes its first year, are networks driving down costs through innovation, and treating operational and capital expenditure as like for like? Apparently so. The early signs suggest the new approach has incentivised networks to keep a tight grip on spending. The vast majority of companies NETWORK / 8 / JUNE 2017 There's still a long way to go, but networks appear to be embracing totex. Has RIIO changed the game? REGULATION reported an underspend on their agreed budget in the order of multiple millions of pounds. In the electricity sector, the transmission owners have received a collective total of £60 million in rewards for delivering against outcome incentives, while each of the three companies have reported that they have underspent their allowance. Across the whole of the eight-year period, they are expected to deliver savings of between 5% and 12%, with an agreed proportion of those savings going to customers in the form of lower bills. Similarly, networks in the electricity distribution sector underspent by 9% on their allowances for the past year, the first in the eight-year cycle, with the overall cost of managing the UK's networks coming in at just £3.2 billion. While the report stressed that it is too early for solid extrapolations or patterns to be drawn, the headline figures showed that the sector collectively underspent by a third of its allowances on network reinforcement. Offering a stronger indication of the new regulatory regime, the gas distribution report found the sector expects to underspend by £2.1 billion, or 12.3% against its totex allowance over the full eight-year term, with the GDNs recouping 63% of that and the remainder being returned to customers. There are clear indications here that costs are being driven down in part by efficiencies and innovation. The GDNs each reported significant savings through running their businesses more efficiently. In particular, more outsourcing and renegotiation of existing contracts, in addition to more flexible deployment of operational staff, have cut costs. Furthermore, the companies reported that innovation plays a key role in the underspends. In particular, they expect major savings through the mains replacement programmes, with the use of robots and new technologies delivering benefits in digging and reinstatement. These are the clearest indicators to date that RIIO might be starting to have the desired impact. And while it might mainly be in gas distribution that the impacts are being shown so far, there are clear signs of the same approaches being taken in other areas, with new technologies and third parties driving operational efficiency. Through totex incentivising the sweating of existing assets, and innovation funding mechanisms with RIIO making money available, networks across sectors are seeking new ways of doing things. Examples include SP Energy Networks' Future Intelligent Transmission Network Substation (Fitness) project, which is trialling the replacement of copper hardwiring with digital communications and fibre in substations to deliver enhanced monitoring and control. If successful, the project is forecast to save the network between £71 million and £107 million by the end of the second regulatory period, RIIO annual reports: overspends and underspends Western Power Distribution Outperforming all other networks for customer satisfaction and receiving the highest ranking under the stakeholder engagement and consumer vulnerability incentive, Western Power Distribution was an early frontrunner in delivering against the performance objectives set out in RIIO. However, despite being the only network to have successfully achieved fast-track status in the RIIO negotiations – where provision of a robust and high-quality business plan and budget during the consultation period is signed off without need for further negotiations – it was also the biggest spender among the networks, coming in at £24 million, or 2% over its allowance. The main factors in the overspend were extra investment in network capability, faults and operational support. UK Power Networks Across its three DNOs, UK Power Networks recorded the biggest underspend over the year, coming in at £208 million, or 24% below its allowance. Attributing this to the decision to delay investment to 2017 in order to reach new efficiency-sharing agreements with key contractors, it remains committed to underspending by 15% over the period. While the company performed well against the main objectives, it was encouraged to improve on both connecting customers and overall customer satisfaction. Its EPN DNO gained the highest rewards of all DNOs under the IIS arrangement. SP Energy Networks Unlike the other networks, SPEN is forecasting neither significant overspend nor underspend against its allowance, and the company expects to come in just 0.4% under that agreed with the regulator. Across both its DNOs, the network exceeded all its reliability targets and cut the time it takes to quote and connect customers. It met its target for complaints handling, but has been encouraged to improve performance on stakeholder engagement. SPEN was one of only two networks to spend all or most of its innovation budget.