Ofgem confirms network price control methodology
In the United Kingdom (UK), the Office of Gas and Electricity Markets (Ofgem) has confirmed its methodology for calculating the next round of network price controls. The new price controls, known as RIIO-2, will, Ofgem says, deliver a "smarter and more sustainable" energy network that will come at a lower cost to consumers. The Renewable Energy Association (REA) welcome RIIO2 boost for Green Gas sector.
If applying the agreed methodology today, Ofgem would set the allowed baseline return on equity at 4.3 percent (CPIH) in a cost of equity range of 4.0 – 5.6 percent, which is almost 50 percent lower than under the previous price control (RIIO-1) and the lowest ever capital rate for energy network companies.
A lower allowed return on equity of 4.3 percent, combined with a lower allowed return on debt, would reduce costs passed on to consumers by £6 billion (≈ EUR 6.8 billion) over the five years of the RIIO-2 price control period (2021-2026) when compared to RIIO-1.
However, the final savings figures for consumers will depend on a number of other factors like operating expenditure, which Ofgem will make a final decision in 2020 after companies have submitted their business plans. The decision relates to the price controls for gas/electricity transmission (T2) and gas distribution (GD2) from 2021 to 2026.
While decisions in the methodology could, in principle, be applied Ofgem will consult separately on the electricity distribution price control (ED2). The savings figures include ED2 for completeness of the potential impact. Approximately three-quarters of the £6 billion savings noted here are due to the transmission (T2) and gas distribution (GD2) controls which begin in 2021.
Increase support and reform innovation funding
As part of the RIIO-2 price control framework, Ofgem will also increase the support provided by network companies to consumers in vulnerable situations, for example by strengthening licence conditions and by incentivising companies to take vulnerability into account when interacting with their customers. Ofgem will also reform current innovation funding, and provide new dedicated funding, to support projects that specifically benefit vulnerable or poorly-served consumers.
Ofgem’s regulatory framework will also facilitate the decarbonisation of power, heat, and transport and the transition to a smarter energy system, enabling consumers to reap the benefits of technological change. Each company’s environmental action plan will be taken into account when funding allowances are set, and a strategic fund will be set up to support large transformational investments that improve the system as a whole.
Our proposals are on track to deliver a tough, fair settlement that strikes a better deal for consumers. Lowering the cost of capital for network energy companies will put money back into consumers’ pockets while service standards are required to remain high. Our new price control for networks will pave the way for a cheaper, smarter and more sustainable energy system and is a key step in our journey to a low carbon future, said Jonathan Brearley, Executive Director for Systems and Networks.
According to Ofgem, since 1990, network companies have invested around £100 billion (≈ EUR 113.3 billion) in the national and local grids, operating one of the most reliable networks in Europe. Power cuts have almost halved since 2001, while customer satisfaction with local networks has improved significantly.
Under Ofgem price controls, the cost of transporting a unit of electricity around Britain has fallen by 17 percent since the mid-1990s, relative to the retail prices index.
Biomethane recognition welcomed by REA
In outlining the price control framework Ofgem “agree that biomethane injection has the potential to be a low regrets approach to decarbonisation” and propose to require Gas Distribution Network operators (GDNOs) to report on biomethane outcomes data as part of the new Annual Environmental Report output.
This, the Renewable Energy Association (REA) says marks a significant change from the original consultation in which Ofgem proposed to remove many of the metrics currently placed on GDNOs related to biomethane.
Green Gas Certification Scheme issues Renewable Gas Guarantees of Origin (RGGOs) for units of biomethane injected into the grid and securely tracks them through to gas consumers who are provided with a Green Gas Certificate that can be used as evidence of their biomethane use. The GGCS is the UKs largest biomethane registry both by sales and production capacity of its members.
This announcement sends positive signals to the biomethane industry and is a strong step towards the necessary and urgent decarbonisation of the UK gas network. REA and REAL welcome the announcement following a successful, lengthy campaign to reverse Ofgem’s initial approach, which excluded biomethane, and look forward to continuing our close engagement with Ofgem.
The GGCS and the REA have fought hard to have the benefits of green gas recognised in the next network price control – from a starting point where Biomethane would have had no recognition or performance metrics, to the final output whereby the regional networks must now work to facilitate biomethane connections, which should ease the process for developing new green gas facilities, said Jesse Scharf, Green Gas Certification Scheme Manager.