Councils need clarity over role in network planning

Sustainability First has pushed Ofgem to provide guidance to local authorities over their anticipated role in the development of business plans by electricity distribution networks.

The not-for-profit thinktank said the regulator needs to make clear how their proposals will be assessed, what supporting evidence they may need to provide and under what conditions the regulator would agree to provide funding.

Responding to a consultation on the sector-specific methodology for the RIIO ED2 price controls, the charity said: “For local authorities, having an understanding of what is expected by Ofgem is critical, if they are to successfully plan and budget.

“They need to understand on what basis Ofgem would in principle agree funding for local strategic network investment proposals submitted by companies as part of the price control process. In particular, devolved, regional and local authorities must understand what detailed evidence they may need to provide in support of company business plans.”

Uncertainty and forecasts

As part of the consultation, Ofgem proposed to align its funding decisions with the “most likely” path towards reaching net zero emissions by 2050 and put forward four different options for establishing the trajectory for each network.

Under the first two options, distribution network operators (DNOs) would be required to build their business plans around a disaggregated central forecast that meets the UK’s net zero target. However, under the second two, DNOs would work with local authorities and other stakeholders to develop a Local Area Energy Plan that would then be used to guide funding decisions.

As well as requesting clarity over the potential role of local authorities, Sustainability First questioned whether Ofgem needs to make such a binary decision between using central and local forecasts, arguing it is just as important for the regulator to establish “how the plans would flex within period to cope with different scenarios – including potentially more extreme shifts in demand.”

The thinktank said this will be necessary to calibrate volume drivers and incentives and ascertain the “option value” of certain investment decisions. “More broadly,” it added, “Ofgem should be looking for the companies to set out clearly how they would anticipate and respond to evidence of faster or slower progress in particular areas through the price control period.”

The organisation welcomed Ofgem’s proposals to use make use of uncertainty mechanisms to adjust funding in response to developments but said DNOs need some “line-of-sight” over the proportion of investment they are likely to cover. It said they must have sufficient financial “headroom” to allow them to respond promptly to emerging needs.

It warned that if a high proportion of investment falls outside of baseline spending allowances “there is a danger that the DNOs could needlessly slow the legitimate net-zero ambitions and targets of others. There may also be a risk of DNOs developing and operating their networks in a needlessly inefficient or piecemeal way.”

The response also urged Ofgem to “worry less” about socialising costs between different regions: “In particular, where investments are being made to support particular cities or geographic areas as path-finders on net zero, then the benefits cannot be ascribed just to the inhabitants of that city but rather to the wider community – including the benefits of carbon reduction and the broader lessons such pioneer cities and metro-areas provide.”

It continued: “There has always been significant cross-subsidy between different parts of the DNO network – rural versus urban for example. There is no reason to be unnecessarily concerned about this in the context of investment to support net zero. It is inevitable that democratic boundaries will not align neatly with DNO areas and this should not be used as a reason to not take account of these important regional voices.”

Incentives

Sustainability First welcomed the regulator’s proposals to introduce strategy delivery incentives (SDIs) for issues like vulnerability and the transition to distribution system operation, stating: “These SDIs require companies to meet Ofgem minimum requirements but also crucially include a financial incentive to ensure that the companies deliver against their strategies and are motivated to go further.”

It said SDIs provide “an appropriate balance of a quantitative and qualitative incentive in what are complex areas” and petitioned Ofgem to consider applying them to decarbonisation and the net zero target as well. “This strategy approach would bring together a cross-cutting incentive mix : clear minimum standards, a mechanism to ensure companies deliver on commitments, financial incentives with some metrics to stretch performance, plus reputational incentives where environmental outputs are not yet readily measured or assessed. A strategy delivery incentive for an environmentally sustainable network would allow Ofgem to send a stronger and more concerted signal to the companies on the value of decarbonisation and net-zero to current and future consumers.”

The thinktank said the current proposals are reliant on “relatively weak” reputational incentives to deliver environmental targets, warning: “If faced with a tight price control, companies will look to make savings where they can. While many have a strong corporate commitment to a sustainability agenda, this may come under pressure should investors face lower returns. We can already see this in water.”