Aug 01, 2017

Ofgem plans tougher price controls for energy systems

Following the publication of their plans to deliver a “fairer, more competitive market for all consumers”, the UK energy regulator, Office of Gas and Electricity Markets (Ofgem), announced that energy systems are undergoing “unprecedented change” and that its next price controls will have to be more adaptable so that companies can improve meeting customers’ needs.

 

 

What changes are taking place to the energy networks?

Ofgem is planning to update and maintain over one million kilometres of pipes and wires in order to deliver reliable energy supplies for consumers. The regulator expects the price controls to enable around £80 billion of investment in transmission and distribution infrastructure, while at the same time reducing network costs by 17%.

Why do price controls need to change?

The energy market is changing, but it is also in an era of uncertainty where renewable energy has increased from 5% of capacity to 24% in 10 years. The uncertainty is mostly about the speed and direction of where the market is going: the increasing popularity of electric vehicles and electrification of heating can especially have a significant impact on the power network.

Ofgem claims it needs to set price controls that will attract global investment, but at the same time, wants to ensure consumers get value for money.

How do price controls work?

Energy networks are monopolies, therefore, Ofgem sets controls for the maximum amount the companies can recover to fund the operation and investment in their networks.

There are four RIIO (Revenue=Incentives+ Innovation+Outputs) price controls for:

  • Gas distribution
  • Electricity distribution
  • Gas transmission
  • Electricity transmission

The current gas distribution and transmission price controls run from 2013-2021. The electricity distribution price control is from 2015-2023.

 

 

Other elements of price control:

  • Financial incentives rewarding improvement and penalising poor performance in customer service, connections and reliability among other
  • Ofgem sets the cost of capital; i.e. the rate of return that companies can pay investors for providing finance

The return that companies make depends on a range of factors, such as:

  • Performance
  • Efficiency in spend compared with what Ofgem has allowed

For more detailed information about the energy networks and price controls, visit the Ofgem website.

 

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