Don’t get tangled up in the pipes and wires

Don't get tangled up in the pipes and wires or purely hung up on returns, says Sustainability First Director, Sharon Darcy.  Instead ensure public interest outcomes flow through the RIIO2 framework 'like the lettering in a stick of rock'

RIIO2, the new price control for energy networks, may not sound the most exciting development in the energy sector.But it is important for all stakeholders - current customers, future consumers and wider interests such as the environment.

The costs involved are significant.In the current price control period, networks will have been allowed to recover revenues of £96 billion over eight years.Bill payers will be paying for these investments.In 2017/18, a typical GB domestic customer will have paid £252 out of their gas and electricity bills to cover network costs. This inevitably raises concerns about short and long-term value for money and affordability.Consumers, and their representatives, should have a say in what they are paying for.

Energy networks frequently have long asset lives.Ensuring that the needs of future consumers – and stakeholders that do not always have a 'voice' such as the environment - are taken into account is also important.

The energy system is already changing.On top of this, further action is needed to close the emissions gap to the fourth and fifth Carbon Budgets. As more distributed generation comes onto the system, the importance of local and community approaches – and engagement - is increasing.Similarly, as the demand side becomes more important to provide flexibility, price controls need to be set with user expectations and behaviours in mind.

With the RIIO2 framework shaping the future of networks into the 2020s and beyond, it will play a key role in ensuring the smart future works for all and there is a 'fair deal' for everyone, today and tomorrow - not just tech savvy early adopters or the more affluent.

The RIIO2 consultation document focuses heavily on the financing questions and the options for limiting company returns. While the level of returns made by companies is an important issue for fairness and building trust and legitimacy, it is not the only one for consumers and stakeholders.

To ensure that the needs of current customers, future consumers and wider stakeholders are met in RIIO2, it is essential that the price control framework continue to focus on outcomes and incentives.

Sustainability First considers that the proposed RIIO2 Framework needs to be strengthened in three key areas:

  • Vulnerability – The consultation document overlooks the needs of customers in vulnerable circumstances. Ofgem needs to give an acknowledgement now that the forthcoming proposals for the gas and electricity distribution sectors will recognise the importance of continuing with an explicit incentive to continue to improve network services for customers in vulnerable circumstances. In any future customer-facing innovation projects, customers with additional needs should be a clear priority in criteria for project evaluation and for project deliverables, including into BAU.
  • Low carbon incentive –The RIIO1 incentives around low carbon are fragmented and as such send a potentially weak and inefficient signal on low carbon in the control.They do not necessarily encourage a joined-up and flexible response from companies. Sustainability First is therefore proposing the introduction of a new low carbon incentive for RIIO2.Our new discussion paper and separate blog on this subject outlines our thinking in this area.
  • Meaningful stakeholder engagement – The focus on giving consumers a stronger voice in the consultation, whilst welcome, is largely concerned with different 'structural' models (groups, panels etc).It does not really cover how engagement will shape outcomes and incentives, short, medium and long-term.Unless these issues are clarified sufficiently early, engagement may not be meaningful. The consultation paper also fails to explain how stakeholder representatives are going to be engaged in the crucial discussions on cost of capital. As long as these are treated as a separate and 'technical' discussion, it may prove challenging to convince the public that returns are in fact 'fair.'

A strong outcomes focus that flows through the RIIO2 regulatory 'like the lettering in a stick of rock' can help avoid the trap of seeing competition and innovation, two of the issues rightly flagged in the consultation, as ends in themselves.Market-led approaches can deliver many benefits in energy, but our research over the last few years has shown competition can struggle to deliver outcomes around long-term resilience, place based well-being and fairness. It has also highlighted the importance of aligning innovation funding and incentives with public interest outcomes.

A stick of rock may not be good for the waistline but it can be a useful reminder of what RIIO2 should be all about: ensuring networks deliver the short and long-term outcomes that are important for those that will be footing the bill - and living with the service and environmental impacts of the associated investment decisions for decades to come.