Utility Week

18 | 12TH - 18TH JANUARY 2018 | UTILITY WEEK Policy & Regulation Analysis T he only network operator expected to exceed its spending allowance under RIIO is National Grid Gas Transmis- sion (NGGT) and none are forecast to receive returns below their baselines. Ofgem's latest reports cover 2016/17, the second year of the ED-1 price control and the fourth year for the rest. They show net- work operators have, in general, performed strongly against their targets. Electricity distribution Distribution network operators (DNOs) scored well against five out of six output categories, the exception being connections. Connections targets were missed by North- ern Powergrid, UK Power Networks and SP Energy Networks (SPEN) across all of their licence areas. SPEN also marginally missed its customer interruptions target for one of its licence areas. DNOs are collectively forecast to spend £25.4 billion over the ED-1 period, represent- ing a 5 per cent underspend when compared with their £26.7 billion allowance. DNOs spent £6.6 billion in the first two years of the price control, which is an underspend of £531 million – or 7 per cent. Return on regulatory equity (RoRE) for individual networks over ED-1 is forecast to range from 6.8 per cent to 11.8 per cent. The average has risen to 9.4 per cent from 2015/16's figure of 9 per cent. This compares with a baseline cost of equity of 6.4 per cent for Western Power Distribution and 6 per cent for the other DNOs. For eight of the 14 licence areas in Great Britain, outperformance was primarily driven by financial rewards for meeting tar- gets. Underspending against allowances was the main cause of outperformance for the remaining six. Underspends predominantly occurred in three cost categories: replacement and refur- bishment of assets; network reinforcement; and other operational capital expenditure. Some of this was down to external factors beyond the control of DNOs such as chang- ing economic conditions that dampened demand for electricity. Improvements in effi- ciency and the timing of investments also played a role. There were relatively high levels of over- spend in two cost categories: faults and oper- ational support. External factors, such as the impact of Storm Doris in February, were the main cause of these overspends. The average domestic customer is expected to pay £83 to cover distribution net- work costs in 2018/19, down 3.5 per cent from £86 in 2017/18. Electricity transmission Transmission operators (TOs) met or exceeded their targets for five out of six outputs, with only Scottish Hydro Electric Transmission (SHET) being penalised for failing to meet its target for SF6 leakages in the environmental category. All three TOs are expected to underspend against their allow- ances over the ET-1 period. National Grid Electricity Transmission (NGET) is forecast to underspend its allow- ance by 20 per cent – more than £1 bil- lion – due to the rescheduling of work and improved strategies to maintain and replace existing assets. SHET is predicted to underspend its allowance by £180 million – or 6 per cent – owing to lower than expected costs for the delivery of three strategic wider works. The impact is expected to be offset somewhat by an overspend on the maintenance and replacement of existing assets by around £100 million – or 33 per cent. Scottish Power Transmission is forecast to underspend its allowance by £80 million – or 4 per cent – partly as a result of improved contracting processes and reduced require- ments for new capacity. In its role as system operator, NGET is expected to underspend its allowance by £47 million because of lower than antici- pated operational costs over the next four years. RoRE is forecast to average around 9.5 per cent across the TOs, compared with a base- line cost of equity of 7 per cent, with individ- ual returns ranging from 9.3 per cent to 10.1 per cent. The average customer is expected to pay £37 to cover transmission network costs in 2018/19. Gas distribution Gas distribution networks (GDNs) have made good progress in delivering their outputs so far, with the exception of Cadent, which failed to meet customer satisfaction targets. All are expected to meet their targets by the end of the GD-1 period. They are collectively forecast to spend £15.5 billion over the price control – 12 per cent less than their £17.6 billion allowance. The figures do not reflect SGN's recent volun- tary return of £145 million of allowances. The underspend is partly the result of improved efficiency, but also variations from estimates made at the time of setting the price control – for example over the cost of iron mains replacement – and external fac- tors such as reduced emergency and repair bills during milder winters. RoRE is expected to average 10.6 per cent compared with a baseline cost of equity of 6.7 per cent. Forecasts for individual net- works range between 9.6 per cent and 11.9 per cent. The average customer is expected to pay £118 for gas distribution in 2018/19. Gas transmission NGGT met all its output targets bar two. The company missed its greenhouse gas emis- sions targets because of increased use of its compressors to deal with higher volumes of gas at its St Fergus terminal. It also missed a target for reliability and availability aer failing to hold several daily capacity auc- tions because of IT problems. The company is predicted to meet all its targets over the GT-1 period. NGGT is forecast to overspend its £2,256 million allowance by £295 million – or 13 per cent – because of costs associated with improving the health of its assets, which are in worse condition than previously thought. The bulk of the cost is expected to be incurred towards the end of the price control and NGGT has so far underspent its allow- ance by 2 per cent. Despite the predicted overspend, the Networks reap RIIO rewards Network returns are set to significantly exceed the baselines set by Ofgem for the first RIIO periods, the regulator has confirmed in its latest annual reports on the price controls. Tom Grimwood reports.

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