National Grid has issued a robust assessment of Ofgem’s price control proposals, urging the regulator to rethink its plans or oversee “five years of missed opportunities for consumers”. The company wants 5.5 per cent returns. Ofgem proposes 4 per cent.
Ofgem aims to deliver a tougher price control after setting a framework (RIIO1) that allowed energy network companies to make bumper profits at the expense of bill payers.
As a result, in RIIO2, it plans to implement significant cuts to the returns and incentives grid companies can earn, from 2021 onwards for electricity transmission and gas distribution, with electricity distribution from 2023.
As part of the price control process, the regulator shows its hand and network companies respond. The process takes several years.
Consultation responses from network companies can be nuanced, and often focus on specific aspects of the regulator’s proposals. National Grid’s, however, implies Ofgem should essentially start again.
Equity returns
National Grid points out that the proposed equity returns in RIIO-2 are less than half that in RIIO-1 and 100 basis points below what the water sector will be allowed.
“The consequences of applying such a reduction in the core incentive to invest would impact consumers in the short and long term,” states Chris Bennett, director, UK regulation. He said Ofgem must correct “errors in approach, arbitrary adjustments and the selective use of available evidence”.
Incentives
National Grid fears Ofgem’s approach to incentives, weighted more towards downside then upside, will foster risk averse approaches and penalty avoidance instead of innovation.
“This will lead to five years of missed opportunities for consumers at this critical time in the transformation and decarbonisation of the energy system when Ofgem should be strengthening existing incentives and seeking to drive new ways for companies to deliver consumer value,” states Bennett.
He adds that National Grid acknowledges the “gaps and imperfections in the RIIO-1 framework which have led to the perception of windfall gains and losses, but the solution is to close these gaps, not reduce incentivisation to compensate”.
As such, National Grid proposes a rethink of the framework.
See its proposals here.
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