6Conclusion
57.Overall, British energy network regulation is in transition. The migration from RPI-X to RIIO has led to significant framework changes. It is important to build market confidence for the stability of the framework. RIIO is an improvement on its predecessor, and there are positive signs that the framework has brought about a more robust negotiation process involving a wider group of stakeholders. However, RIIO has not gone far enough in providing value for money for consumers of energy. We are particularly concerned by the greater than expected profits by the network companies after the first year of the new framework. As set out in this report, a number of changes are needed to provide greater transparency of how network costs are calculated and passed onto consumers. Greater transparency will allow more scrutiny for this often overlooked aspect of the UK’s energy market and help to ensure that it is held to account. This is needed particularly in view of the absence of any real competition in the transmission and distribution functions.
58.We are concerned that the network cost recovery framework is excessively complex with barriers which hinder the development of a competitive market. Simplifications to charging methodologies would strengthen the market’s ability to scrutinise costs, and increase pressure for more efficiencies.
59.We recognise the need to balance investment in network infrastructure against cost reductions, but we want to see Ofgem both develop more incentives focussed on the roll-out of network technology, such as smart grids, and connect more consumers and smaller energy providers to the grid.
Conclusions and recommendations
Connecting small generators onto the network
1.Ofgem has agreed price control settlements with the gas and electricity transmission companies and gas distribution companies until 2021 and with electricity distribution until 2023. We believe that the price controls are too generous and the targets are too low. We want Ofgem to utilise the RIIO price control frameworks to put more pressure on the networks to limit their costs and provide better value for consumers, for example through a mid-term review, ideally supported by an independent auditor to enable more accurate calculations of future price controls. We also recommend that DECC and Ofgem introduce an effective “connect and manage” policy for distribution-connected generation to clear the backlog and enable more connections. We recommend that the Government and Ofgem submit data on the number and regional variation of the backlog of connections, an analysis of the reasons behind it, and proposed solutions with a clear timeframe for network companies to address the backlog. (Paragraph 19)
Are network costs too complex?
2.To introduce a national tariff for gas and electricity transmission and distribution would require major changes to the existing charging system for network costs. For this change to be considered, further evidence must be gathered and a robust analysis undertaken. We recommend that the Government and Ofgem publish an evidence-based analysis of the advantages and disadvantages of introducing national tariffs for transmission and distribution network charges. These national and regional charges should include data on the costs for connecting different energy types, such as renewable energy sources. (Paragraph 25)
Standardised reporting
3.A standard form of reporting would bring clarity to the performance of the network companies and the impact of the RIIO price framework. We welcome Ofgem’s approach to ensure that network companies provide comparable information at fixed, regular times. We would like Ofgem to provide a clear timetable to phase in this standard form of reporting, and more information on the interim arrangements. We also recommend that Ofgem continues to encourage network companies to engage more directly with consumers and include qualitative and quantitative information on consumer engagement in their reports. (Paragraph 28)
Volatility
4.The levels of volatility of network costs are unnecessary. The risk premiums that suppliers are compelled to add to mitigate the costs of volatility raise consumer prices. We recommend that Ofgem adopts the proposal to provide suppliers with 15 months’ notice of network price changes. Network companies must also provide clearer explanations for the reasons behind such changes. (Paragraph 34)
Benchmarks and incentives
5.Benchmarks have an important role to play in helping Ofgem set meaningful targets for network companies. We recommend that Ofgem further develop its use of national and international benchmarks when evaluating the impact of the RIIO framework on network companies. These benchmarks should be drawn from other regulated and non-regulated industries in the UK as well as overseas in addition to not-for-profit/mutual energy companies. These benchmarks should be developed well ahead of the next round of RIIO performance reporting. We also recommend that standard accounting practices be applied to encourage more robust benchmarking. Ofgem should provide a clearer timeline for extending depreciation of network assets from 20 to 45 years, and propose interim measures during this process to allow more ‘like-for-like’ accounting comparisons. (Paragraph 42)
Losses and leakages
6.While gas distribution leakages have improved, the current incentives to reduce energy losses and leakages are not fit for purpose, particularly for electricity networks. We were concerned to hear that Ofgem had paid incentives to network companies who had not reduced losses in proportion to those incentives. Consumers are losing out. We recommend that Ofgem develops explicit loss reduction targets and incorporates tougher penalties for network companies that fail to meet them. Introducing locational charges for leakages rather than uniform losses would encourage network companies to be more rigorous about cutting leakages. (Paragraph 55)
7.Greater public scrutiny would also assist market performance, so we recommend that Ofgem publish the network companies’ performance against loss reduction strategies alongside the UK’s performance against international rankings of losses and provide a commentary on good and poor performers. This combination of information on individual and macro performance on loss reduction should help the market to hold the sector to account, which in turn can spur on energy efficiency and market effectiveness. (Paragraph 56)
Conclusion
8.Overall, British energy network regulation is in transition. The migration from RPI-X to RIIO has led to significant framework changes. It is important to build market confidence for the stability of the framework. RIIO is an improvement on its predecessor, and there are positive signs that the framework has brought about a more robust negotiation process involving a wider group of stakeholders. However, RIIO has not gone far enough in providing value for money for consumers of energy. We are particularly concerned by the greater than expected profits by the network companies after the first year of the new framework. As set out in this report, a number of changes are needed to provide greater transparency of how network costs are calculated and passed onto consumers. Greater transparency will allow more scrutiny for this often overlooked aspect of the UK’s energy market and help to ensure that it is held to account. This is needed particularly in view of the absence of any real competition in the transmission and distribution functions. (Paragraph 57)
9.We are concerned that the network cost recovery framework is excessively complex with barriers which hinder the development of a competitive market. Simplifications to charging methodologies would strengthen the market’s ability to scrutinise costs, and increase pressure for more efficiencies. (Paragraph 58)
10.We recognise the need to balance investment in network infrastructure against cost reductions, but we want to see Ofgem both develop more incentives focussed on the roll-out of network technology, such as smart grids, and connect more consumers and smaller energy providers to the grid. (Paragraph 59)