Industry NewsUK energy regulator, Ofgem, has presented a major overhaul of the way it controls the prices and services on offer from the energy network operators, in order to meet the growing challenges to security of supply and sustainability. It has been estimated that ?32 billion will need to be invested in the networks alone over the next decade, and there are concerns that the current price-control model could lead to consumer prices rising, without all the necessary benefits or network enhancements being made. The regulator has indicated that the energy industry as a whole will need to invest ?200 billion over this time frame, with estimates this will increase consumer prices by 25 per cent.
Ofgem has launched a consultation on its new price control model – 'Revenue = Incentives + Innovation + Outputs' (RIIO) – with a plan to introduce it from 2013. The aim is to provide greater incentive for proper investments, by allowing higher returns for companies which "innovate, deliver good service and produce well-evidenced plans." At the same time, those network operators which are seen to be underperforming will see lower returns and "more intrusive regulation". The aim is to ensure the delivery of a low-carbon energy network, while also maintaining value for money, high service standards, and security of supply. The regulator is asking companies to become 'smarter' in dealing with the challenges of increasing renewable generation, as well as the expected changes in energy usage. One of the main modifications being proposed is to extend the price-control period from five to eight years. This is to provide network operators with a longer period of certainty when they are developing their investment plans. This also has the potential of spreading the cost to consumers over a longer period, reducing the annual expected price increase.
Unveiling the proposals, which will be further refined over the next few months, Ofgem's Chief Executive Alistair Buchanan said, "If Britain's energy networks are going to meet the challenge of delivering a low carbon economy then we need them to have innovation in their DNA. To bring about this change Ofgem is seeking to make regulation 'smarter' by placing more emphasis on financial incentives to deliver efficient innovation and investment over a longer timescale." He added, "RIIO regulation will protect consumers by rewarding those companies that innovate and invest efficiently, but will punish those companies which perform badly for consumers with lower returns on their investment." The final proposals will be published in September 2010.