Utility Week

UTILITY Week 9th June 2017

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

Issue link: https://fhpublishing.uberflip.com/i/834039

Contents of this Issue


Page 16 of 31

UTILITY WEEK | 9TH - 15TH JUNE 2017 | 17 Policy & Regulation Analysis W ith most of the networks now more than half way through their RIIO settlements, attention is beginning to turn towards the next period of the new price control regime. The dramatic changes the energy system has already undergone during the first chap- ter will no doubt be surpassed by those of the second. So, in what ways will the framework need to be altered to ensure that it helps rather than hinders this transformation? There is a broad consensus that on a fun- damental level RIIO has worked as intended, pushing networks to innovate while further honing their existing operations. Writing in Utility Week recently, former Ofgem senior partner for networks Maxine Frerk described how RIIO had become an international "role model" and warned the regulator not to "throw the baby out with bath water" when deciding where next. There was agreement on this at Utility Week Live 2017 last month, where a succes- sion of conference speakers presented the case for tweaks rather than an overhaul. "Evolution" not "revolution", said UK Power Networks (UKPN) director of strategy and regulation Suleman Alli. "I think RIIO has provided a good, strong foundation." At the same time, all had plenty of ideas on how to improve the framework. Simon Harrison, group strategic devel- opment manager at consultancy Mott Mac- Donald, said it needed to be "flexible" and "agile" to reflect increased uncertainty. He warned that rigid price controls would leave networks "straight-jacketed" and unable to adapt to a fast-changing environment. Stephen Hall from the University of Leeds agreed. Presenting findings from the Energy Research Partnership's Utility 2050 project, he told delegates that innovative products and services could account for up to 30 per cent of the value of the energy market by the middle of the century. The project examined possible futures for the UK's energy system and concluded that the financial opportunities created by electric vehicles, flexibility and low-carbon generation were "massively volatile across scenarios". He said: "We know there's going to be a lot of business model churn… Differ- ent futures mean different pools of value." The research showed that opportunities to create value from flexibility will be espe- cially volatile. So much so that "only small start-ups" will be interested in taking a dip, and even they may need to be enticed with the offer of a risk premium, said Hall. "We'd need to be looking at higher rates of return than are currently available in the sector without someone saying: 'We need to put a cap on tariffs because someone is earning more than 6 per cent.' "To try new things, to experiment with new things and to ultimately grow them into the market, I think a more sophisticated appreciation of risk and company failure is necessary." However, British Gas head of network regulation Andrew Manning warned that this must not translate into largesse. Although he agreed that RIIO had been successful in encouraging innovation, Man- ning said it was "less clear" that it had delivered value for consumers: "Under the current set of RIIO price controls every net- work has been able to outperform the base- line level set by Ofgem." He said the electricity distribution net- works are set to receive rewards totalling £647 million during the current period for merely maintaining the initial level of reli- ability, and he questioned why. In March 2015, British Gas appealed against the settlement for electricity distri- bution, partly on the basis that it was too generous. The CMA eventually dismissed the appeal on four out of five grounds, but it also told Ofgem it needed to "engage stakehold- ers who criticised the process when develop- ing future target-setting approaches". "That's what we feel is the missing part," Manning said, recalling the episode. "There has to be a degree of rigour in the process. As stakeholders engage and make their points, there needs to be an obligation to either accept those points or explain why not." Manning said Ofgem should take a more proactive approach to engagement – seeking Where should RIIO go next? The RIIO regulatory framework needs to evolve to reflect the increased speed of change in the energy sector, but Ofgem should beware tinkering with the fundamentals, says Tom Grimwood. out the diverse range of stakeholders and educating them about key issues. He said the problem was exemplified by a recent consultation to which British Gas owner Centrica was the only one to reply: "Something is not right there if on funda- mental issues for price controls only one industry party is responding." UKPN's Alli said the next settlement needed to be flexible about timing as well as returns. He explained that his firm is hold- ing tenders this year for "up to a dozen sites where, rather than reinforcing, we want to buy a service contract". "If I underspend in year one, a propor- tion of that underspend is passed back to customers," he added. "Within period my revenues drop." He urged debate over how the deferral of investment is treated in fol- lowing periods. Furthermore, Alli said RIIO2 offered an excellent opportunity to develop incentives for whole-system solutions, "whether that be transmission investment, distribution investment or flexible solutions". Frerk has suggested that this may require the alignment the RIIO settlement periods. The electricity distribution settlement cur- rently runs two years behind the others. UKPN chief executive Basil Scarsella also said that in the face of great uncertainty the settlement periods should probably be shorter: "For the regulator to try and predict the future in a regulatory regime [of eight years] – I think it is an unreasonable ask." He claimed that unless the duration of the next electricity distribution was reduced, there would be "so many re-openers and uncertainty mechanisms that it will be dif- ficult to manage". Ofgem will need to walk a careful balanc- ing act as it formulates the second round of the RIIO price controls. The regulations clearly need to be more flexible and adapt- able to reflect the growing uncertainty and the accelerating pace of change. But they need to do so while continuing to put pres- sure on networks to be efficient and dem- onstrate customer value for money. Finding this equilibrium will be no easy task.

Articles in this issue

Archives of this issue

view archives of Utility Week - UTILITY Week 9th June 2017