Utility Week

8 | 8TH - 14TH JUNE 2018 | UTILITY WEEK Policy & Regulation Analysis C reating a smarter, more flexible energy system could save consumers up to £40 billion by the middle of the cen- tury. So says the government's smart systems and flexibility plan, released to widespread acclaim in July last year. Networks will be absolutely central to the vision outlined in the landmark document. In the networks theatre at the Utility Week Live conference in Birmingham last month hosted in association with Smarter Grid Solutions, industry figures came together to go over the progress they are making towards that vision as well as their plans for the future. The event began with a discussion of the regulatory regime that will underpin their transformation. With the first RIIO period now more than halfway through for all but electricity dis- tribution, work is well under way to update the framework for the second round of price controls, beginning in 2021. Back in March, Ofgem published a consultation that out- lined its initial proposals. In recent years, networks and their returns have been under the spotlight, hav- ing previously escaped the scrutiny to which suppliers have long been subject. Citizens Advice has said that network operators are on track to earn £7.5 billion in "excessive profits", and business and energy secretary Greg Clark has said distribution network operators have grown "fat and lazy" at the expense of customers. As such, the document focused on efforts to prevent similar accusations in future. The regulator revealed plans to shorten the price controls to five years, slash the cost of equity, adjust the way it calculates the cost of debt, and introduce failsafe mechanisms to pre- vent profits from exceeding expectations. RIIO's track record Speaking at Utility Week Live, Suleman Alli, director of strategy at UK Power Networks (UKPN), sought to defend the track record of the RIIO framework in driving down costs and improving performance. "If you were a customer of ours in 2010, you'd be interrupted on average once every one and a half years," he told delegates. "That's now once every two and a half years. "In 2010, if you had the misfortune of having a power cut, it would last over an hour. It's now half an hour." Alli said this was a result of the regime's clear focus on operational performance: "It's made that performance absolutely transpar- ent and comparable between companies, and it's given management the tools and the incentives to absolutely nail it." He recounted how, when joining UKPN, he had met an engineer to discuss the intro- duction of a new self-healing grid technology called APRS (automatic power restoration system). "As an engineer, he opened up his spreadsheet and showed me what our cus- tomer minutes lost would have been under the old system, what it is now as a result of the investments we've made given the incen- tive frameworks of RIIO, and, most impor- tantly for an engineer, showed me how much incentive revenue we'd earned as a business. "That is the power of incentive-based regulation." Steven Edwards, director of regulation for Wales and West Utilities, concurred. He said networks have changed "massively for the better" since RIIO came into effect, and that they pay much more attention to cus- tomer engagement. He noted that the best-scoring networks at the beginning of the price controls would now rank lowest if judged by the same per- formance criteria. Nevertheless, Alli said network operators must tackle "head-on" the criticisms that have been levelled against RIIO, whether "perceived or real". Edwards and Alli both called for incentives to be sharpened to penalise those networks that underperform, and for Ofgem to make greater use of uncer- tainty mechanisms. Reiterating some of the proposals from the March consultation, Ofgem's executive director for systems and networks, Jonathan Brearley, said the mechanisms for innova- tion funding in the price controls had been "successful" but had to be refocused on "big, strategic, cost-cutting issues". "That means more collaborative projects, more projects focused on the much wider- scale issues, that we as a sector face," he explained. The network operators also needed to accelerate the pace at which innovations become business as usual. That said, he agreed that, on the whole, the RIIO framework is working: "We have a stable regulatory regime, we've seen cost to consumers fall, we've seen huge improve- ments in customer services, we've seen huge improvements in reliability – and RIIO as Experience and expectations Networks are at the heart of plans to transform the energy system over the coming decades. Tom Grimwood reports from Utility Week Live on the progress so far and the outlook for the future. Payments for facilitating local energy market transactions Payments for meeting public policy goals Payments for one-off non-wire alternatives to grid reinforcement Traditional cost of service 10-15 years Performance- based regulation Cost of service CATHERINE MITCHELL'S PROPOSALS FOR FUTURE PRICE CONTROLS Performance- based regulation Cost of service Source: Engineering and Physical Sciences Research Council

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