Growth and Infrastructure Bill

Memorandum submitted by Ofgem (GIB 06)

Submission to the House of Commons Public Bill Committee – Growth and Infrastructure Bill

1.1. Ofgem is the Office of the Gas and Electricity Markets. Protecting consumers is our first priority. We do this by promoting competition, wherever appropriate, and regulating the monopoly companies which run the gas and electricity networks. 

1.2. We are making this short submission to the House of Commons Public Bill Committee for the Growth and Infrastructure Bill. Our submission relates to the Government’s proposed amendment of the Gas Act 1986. This is clause 16 of the Bill ‘Conditions of licences under Gas Act 1986’.

Context

1.3. The unprecedented challenges of making the transition to a low carbon economy and securing supplies as efficiently as possible has led Ofgem to introduce the biggest change to the regulatory framework for 20 years. Ofgem’s new performance-based model, RIIO, seeks to ensure consumers get the necessary investment in Britain’s pipes and wires for a fair price.

1.4. In 2010 Ofgem estimated that over £200 billion needs to be spent in the next 10 years to secure supplies for consumers and to move to a low carbon economy [1] . Of this, we estimated that around £32 billion would need to be spent on pipes and wires against an industry worth over £43 billion. This represented an increase in value of 75 per cent – and a doubling of the rate of investment from the previous 20 years.

1.5. In order to attract efficient investment, Ofgem’s new performance based RIIO model for price controls rewards companies that innovate and run their networks to better meet the needs of consumers and network users. It does this by setting longer eight-year price controls, offering incentives focused on delivering results, and by providing a Network Innovation Competition (NIC) to encourage the development of smart grids and low carbon energy networks.

1.6. The NIC could provide funding of £240m for the electricity sector and £160m for the gas sector over the course of the first RIIO price controls (2013-2021).

The Issue

1.7. In seeking to implement the NIC, we identified that - in order for the competitive mechanism to work as designed - Gas Transporters need to be able to raise and transfer funds between one another. At present the Gas Act does not allow for this. This differs from the framework in the Electricity Act 1989 which allows for the raising and paying of amounts to all electricity licence holders.

1.8. This apparent anomaly in the drafting of the Gas Act reflects the structure of the gas industry at privatisation. At that time there was only one Gas Transporter, so the Gas Act did not need to contain provisions that could require the raising and paying of monies to other Gas Transporters. Since privatisation the number of Gas Transporters has increased. National Grid Gas plc (NGG) has sold four of its eight gas distribution networks, independent gas transporters have been introduced and distribution networks and some National Transmission System activities have been separated under the Gas Transporter licence.

Resolution

1.9. The Government’s proposed amendment to the Gas Act through this Bill would resolve this anomaly. In doing so it would allow the NIC to be run as intended – we believe this would bring significant benefit into the GB Gas sector – it will enable investment in low carbon innovations which in the long run will see customers’ costs lowered and improved quality of service.

1.10. In the light of the above Ofgem would like to set out our support for the Government’s proposed amendment. We hope that your Committee are able to support this important clause.

November 2012


[1] See http://www.ofgem.gov.uk/Markets/WhlMkts/monitoring-energy-security/Discovery/Documents1/Project_Discovery_FebConDoc_FINAL.pdf

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Prepared 14th November 2012