ASTI incentives reward networks for late completion of grid upgrades 

Citizens Advice has expressed concerns over the output delivery incentive for the Accelerated Strategic Transmission Infrastructure (ASTI) framework, which it says can reward network companies for completing projects up to two years late. 

In general, the charity says the incentive regime for energy networks needs to be “reviewed and recalibrated” to avoid over-rewarding companies and deliver value for money.  

The ASTI framework was introduced by Ofgem in 2022 to accelerate the delivery of strategic grid upgrades by streamlining the regulatory approvals process. The framework includes an output deliver incentive (ODI) scheme to reward transmission owners (TOs) for delivering projects on time and penalise them for delays.  

Despite featuring exemptions to protect TOs from being penalised for delays beyond their control, Citizens Advice said Ofgem made the incentive “much softer” than originally proposed after TOs argued that the balance of risk wasn’t appropriate.  

Firstly, the regulator provided “additional headroom” by setting the target date at the end of the year in which the project needs to be delivered. Secondly, the “neutral date,” before which TOs are rewarded and after which they are penalised, was set a year later than the target date.  

It said: “In practice this means that, at best, TOs can earn a reward for delivering up to a year late and, at its worst, could earn a reward for delivering two years late.” 

Citizens Advice raised the issue in its response to the sector-specific methodology consultation for the RIIO3 price controls for transmission and gas distribution, which are due to commence in April 2026. It highlighted this as a “clear example” of a wider problem of financial incentives being “skewed” against consumers.  

The charity said the incentive regime as a whole “requires a lot of development to avoid over-rewarding companies”. It said incentives such as those concerning customer service and supply interruptions “need to be reviewed and recalibrated following an assessment of RIIO2 performance”. 

“Without a qualitative assessment of whether incentives worked to drive performance improvements in RIIO2, 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 RIIO3,” it added.  

The charity also highlighted the example of the ODI for transmission owners to support the Electricity System Operator in minimising constraint costs. In June 2023, Ofgem decided to keep the incentive in place for the remainder of the RIIO2 period after trialling it over the first two years.  

The incentive allows transmission owners to keep 10% of the achieved reduction in constraint costs, which Ofgem said amounted to almost £280 million in 2022/23. However, the annual value of the incentive across the three TOs was capped at £8.5 million.  

Although incentivising TOs to minimise constraint costs is in the interests of consumers, Citizens Advice said they were able to earn this maximum reward while incurring just £1 million of costs.  

“This is an extraordinary rate of return,” it remarked. “Beyond the direct impact on consumer bills, outcomes like these undermine the legitimacy of the regulatory arrangements.” 

The charity said this reward could clearly be reduced substantially without reducing the motivation for TOs to reduce constraint costs.  

Citizens Advice also argued that sharing factors – the proportion of any underspends networks can keep or overspends they must cover – should be reduced from their current levels.  

The charity said they “don’t believe there is overwhelming evidence that a company’s behaviour is materially changed by either lower or higher sharing factors.”  

It said their analysis of total expenditure (totex) performance during the RIIO1 price controls “indicates that there is not a strong correlation between lower sharing factors and companies performing less efficiently. Similarly, the evidence doesn’t point to higher sharing factors leading to a greater likelihood of being inefficient. 

“It therefore seems logical to set sharing factors in RIIO3 at a lower level than in RIIO1 and RIIO2.” 

Citizens Advice acknowledged that lower sharing factors would also expose consumers to a greater share of overspends but said: “Historically companies are significantly more likely to underspend their totex allowances than overspend.” 

It additionally noted that the RIIO3 price controls will feature multiple mechanisms to adjust allowances to mitigate inflation “if costs turn out to be unforeseeably different to what was predicted in business plans”. 

For the RIIO2 price controls, sharing factors were calculated based on Ofgem’s level of confidence in the cost forecasts submitted in networks’ business plans. Costs in which the regulator had a high level of confidence were allocated a sharing factor of 50% and costs in which it had a low level of confidence were allocated a sharing factor of 15%. The results of this assessment were then used to produce a weighted average for each company.  

Companies that submitted forecasts lower than the regulator benchmark also received an upfront reward based on this confidence-dependent incentive rate (CDIR) in the fourth and final stage of its Business Plan Incentive (BPI) process.  

For the RIIO3 price controls, Ofgem is considering three possible options for setting sharing factors: firstly, retaining the CDIR but with improved guidance; secondly, using a mechanism like the Information Quality Incentive used for the RIIO1 price controls or Ofwat’s approach for PR24; and lastly, fixing sharing factors in line with current rates or on a sectoral basis. Under the IQI mechanism, sharing factors were linked to the ratio of companies’ submitted forecasts to Ofgem’s view of efficient costs.  

Citizens Advice said its recommendation depends on whether Ofgem’s aim is to merely incentivise efficiency or also to incentivise truth-telling. When it comes to setting sharing factors, the charity said the former is “essential” whilst the latter is only “desirable”. It said addressing information asymmetry between the regulator and networks “may be better achieved directly through the truth-telling incentive alone” – i.e. the BPI.  

It continued: “We don’t believe that using CDIR to determine sharing factors will have any meaningful impact on information asymmetry. This is because the incentive to inflate forecasts remains regardless of the level of sharing factors and, as we have outlined above, there is no evidence the level of sharing factors affects behaviours.  

“So, if seeking to address information asymmetry alongside incentivising efficient delivery, CDIR can be discounted and IQI should be further explored.”