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Ofgem RIIO2 Sector Specific Methodology Consultation: How Ofgem could raise its game on low carbon in RIIO2

The RIIO2 price control process is set to shape customer and consumer service levels and investment plans by the GB energy networks for years to come.

Over the past year Sustainability First has taken a strong interest in how Ofgem would frame its approach in the RIIO2 process towards low-carbon facilitation by the energy networks.

Not least, an important aim should be good alignment of Ofgem's own detailed RIIOI2 regulatory frameworks with the overall direction of travel implied by the government's Clean Growth Strategy and the trajectories of the 4th and 5th carbon budgets.

In 2018, Ofgem published its RIIO2 strategy and framework. And in late 2018 another important milestone in the RIIO2 process was reached with publication of Ofgem's draft sector specific methodology document - together with separate annexes for electricity transmission (ET), gas transmission (GT), gas distribution (GD), and the electricity system operator (ESO) – alongside Ofgem's latest guidance to the companies on development of their Business Plans for submissionto Ofgem by end-2019.

We have looked across this large document-set to better understand Ofgem's proposed regulatory approach in RIIO2 towards the environment, sustainability and low-carbon. We see six areas where we believe Ofgem could 'up its game'. And, in so doing, send a clearer signal on low-carbon facilitation to the companies that Ofgem regulates.

  • Ofgem appears to have over-looked some important lessons from RIIO1 on treatment of the environment and low carbon - weak sector signalling, fragmented incentives and little cross-sector coherence, and insufficient attention to environmental reporting[1]. The RIIO2 methodology risks repeating these shortcomings.

  • Despite welcome inclusion of a high-level RIIO2 outcome on the energy transition (Outcome 3) – in practice Ofgem does not drive approaches to delivering this outcome into its detailed methodology documents. This is important if company business plans are to reflect an appropriate role in low-carbon facilitation in the decade ahead.

  • Ofgem has wholly 'devolved' treatment of the environment and low carbon to each separate sector methodology (for ET, GT, GD & ESO). Inconsistent approaches and poor alignment will result. Ofgem should frame and give a strong message about its own ambition through a short statement of principle on the environment, sustainability and low-carbon facilitation - common to all the RIIO2 methodologies. This should be added to the main methodology document and to the Business Plan guidance. Our submission suggests six points for inclusion in any such statement.

  • Annual environmental impact reporting should be required as a standard licence condition for electricity transmission, gas transmission, gas distribution and the ESO – just as for electricity distribution introduced in RIIO-ED1. Business Carbon Footprint reporting should continue to sit within this. Clear and comparable approaches to annual environmental reporting - at company, sector and cross-sector level – including on direct and indirect emissions - should be a basic building block of a whole-systems approach.

  • Each sector methodology needs to reflect a 'right overall balance' in the chosen mix of regulatory approaches to deliver better environment and low carbon outcomes for that sector – as between licence obligations, appropriate standards, metrics and stretching targets, business plan deliverables and explicitly incentivised outputs where appropriate. The Electricity Transmission methodology does indeed address this mix of inputs to company environment and low-carbon outcomes in a considered way. The electricity transmission methodology on the environment and low-carbon should be considered as a benchmark for the approaches to be adopted for gas transmission and gas distribution – and subsequently for electricity distribution in RIIO-ED2.

  • The sector methodology for gas distribution takes an unduly narrow approach on low-carbon – and does not support 'cultural ambition' among gas distribution networks on low-carbon facilitation. Within the bounds of continued efficiency and value for money, the RIIO2 gas distribution methodology should encourage a greater ambition-level on, for example : annual environmental reporting, tackling methane leakage outside of repex programmes[2]; supporting greater volumes of bio-methane injection on a network-wide basis; and, on a 'low-regrets' basis, considering approaches to promoting low-carbon heat, especially for consumers in vulnerable circumstances.

  • Customers increasingly care about the environment, sustainability and low-carbon delivery - as well as price, affordability and service. These are not choices of an 'either / or' nature. Ofgem's principal objective in statute clearly defines consumer and future consumer interests, inter al, in the reduction of greenhouse gas emissions. As such, Ofgem has a clear duty to give these issues full consideration in the RIIO2 strategy, framework and methodology. We therefore very much hope that when the final RIIO2 sector methodology is published in May 2019, that it will embrace a somewhat more strategic overall approach on low-carbon.

    A copy of the full Sustainability First submission to the RIIO2 sector specific methodology is published on our website:

    Contact: This email address is being protected from spambots. You need JavaScript enabled to view it.

    [1] A Low-Carbon Incentive in RIIO2. Discussion Paper. Sustainability First. May 2018

    [2] Safety-driven capital programmes for replacement of old cast-iron gas mains 

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