Citizens Advice response to RIIO-3 Sector Specific Methodology for the Gas Distribution, Gas Transmission and Electricity Transmission Sectors
Citizens Advice welcomes the opportunity to respond to Ofgem’s RIIO-3 Sector Specific Methodology for the Gas Distribution (GD), Gas Transmission (GT) and Electricity Transmission (ET) Sectors. We are responding in our role as the consumer advocate for energy and have focused our response on questions where we can add most value. We have highlighted key themes for the Executive Summary. These represent areas with the highest potential consumer impacts, questions left unanswered in the consultation, or topics where we may diverge from the positions of Ofgem or the networks.
The cost of capital will likely be set too high. In basing its approach on the UK Regulators Network (UKRN)’s guidance on the methodology for setting the cost of capital, Ofgem will set network returns at an unjustified level, benefiting company shareholders at the expense of consumers. This is due to UKRN’s guidance bringing together existing methodologies and so consolidating the positions of regulated companies that have a commercial incentive to deliver high returns. Without attempts to remove the asymmetries between companies and consumer advocates, the trend of inflated network profits will likely continue into RIIO-3.
The incentive regime requires a lot of development to avoid over-rewarding companies.
Financial incentives need to be reviewed and recalibrated following an assessment of RIIO-2 performance. Many incentives in RIIO-2 such as customer service and interruptions have rewarded networks. Without a qualitative assessment of whether incentives worked to drive performance improvements in RIIO-2, whilst also crucially delivering consumer value for money, it will be difficult to make informed decisions on whether they should be retained, modified or removed in RIIO-3.
Ofgem should also ensure the principles of each financial incentive, including usable descriptions of performance that deserves rewards/penalties are set out clearly up front in SSMD to best enable subsequent discussion and decision making on calibration.
Some electricity transmission incentives require significant changes. The Accelerated Strategic Transmission Investment (ASTI) mechanism is weighted in favour of improving the risk/reward ratio for Transmission Operators (TOs) rather than reducing costs for consumers. Additionally, incentives on TOs to manage constraint costs allowed them to earn over £8 million in rewards in one year compared to costs of £1 million.
Ofgem should strongly consider setting sharing factors on a consistent basis across sectors and at a lower level than in previous price controls. At present, evidence does not indicate that high or low sharing factors materially alter company behaviour, but do clearly alter the value for money consumers experience. Ofgem must ensure sharing factors are set at a level which drives efficiencies but delivers maximum consumer value for money, particularly where investment is set to increase.
Gas decommissioning should not be funded through RIIO-3. The government has yet to make decisions on how and when the gas network will be decommissioned, and how it will be paid for. As all consumers will benefit from a decarbonised energy system, the fairest way to pay for decommissioning will be through general taxation. Ofgem should therefore not introduce any mechanisms or use RIIO-3 to fund these costs regressively amongst gas consumers.
Future Energy Scenarios should be selected carefully across different sectors. Though it is not necessarily essential for the chosen scenarios to remain consistent across GD and ET, the rationale for their selection should be consistently applied. In highlighting both Leading the Way and Falling Short for gas networks’ planning pathways, Ofgem has provided two potential extremes of changes in gas demand. The System Transformation scenario should also be considered as it reflects the National Energy System Operator (NESO)’s 5 year forecast for a plausible decarbonisation pathway and seems a necessary additional data point to assess business plans against.
Getting this right matters beyond the direct impact on consumer bills. Unless these issues are addressed, the essential public support needed to achieve net zero could be undermined by perceived unfairness in the energy system.