ED2 seasonal reading

After distribution network operators (DNOs) published their final RIIO ED2 business plans last month, Grid Edge Policy director and former Ofgem partner, Maxine Frerk, tries (and struggles) to draw some comparisons. Given their various inconsistencies and sheer size – amounting to ten of thousands of pages when including the supporting documents - Frerk asks: who are they expecting to read them?

Rather too much of my Christmas break was spent wading through the ED2 business plans that the DNOs had to submit to Ofgem at the start of December.

Each business plan was limited in length to 200 pages but alongside that the companies each produced around 50 additional supporting documents – annexes, strategies et cetera – often with appendices to the annexes. These supporting documents varied in length between a dozen pages and around 200. By my estimation that’s around 30,000 pages or close to 20 million words in total. And that’s before you get into the engineering justification papers (or cost-benefit analyses) for specific investments which accounted for perhaps another 100 documents per company.

Who do the companies think is actually going to read all these documents and is this really the basis of the agile regulation that Ofgem claims it wants to see? The tone was set by Ofgem’s business plan guidance – itself 150 pages long – but the companies decide what level of information they need to provide and how to present it.

Of course, I didn’t try to read all the documents and the structure of annexes meant I could just dip into my favourite obscure topics (like the losses strategies) but the information could still have been presented more concisely with some sympathy for whoever – stakeholders or Ofgem – might ultimately have to read it.

More worrying though is the fact that without armies to wade through all the detail (and perhaps even with them) it is nigh on impossible to tell how ambitious a company’s plan is compared to the others. Aside from the volume of material, the problem is that Ofgem has done very little to ensure that the information is presented on a consistent basis making comparisons across DNOs a real challenge. There is detailed guidance on the numbers to be included in the spreadsheets that Ofgem relies on including a helpful strategic summary sheet that Ofgem has requested but which only Scottish and Southern Electricity Networks (SSEN) appear to have published.

Tom Grimwood’s summary of the ED2 plans in numbers set out the headlines but it is hard to draw any real conclusions from them. However, I’m going to try.

If you simply look at totex (total expenditure) compared to ED1 then that starts to tell a story. UK Power Networks (UKPN) are projecting an increase of 12% while the rest of the DNOs are all projecting significantly higher increases of between 28% and 33% (which for these purposes are pretty much in a pack). The precise figures depend on whether or not you include real price effects (RPEs) and the basis of the ED1 figures but the picture is clear.

So, what is it that makes UKPN different and are they really the superstars that these figures suggest?

The first obvious test is what level of load growth is assumed in these forecasts given that that there is huge uncertainty around the pathway to net zero and putting less into the baseline and relying more on uncertainty mechanisms is one way to make your plan look superficially good. Working out what is actually assumed here is incredibly difficult as even though the companies all use the National Grid Future Energy Scenarios (FES) as a starting point, UKPN have Consumer Transformation as the least cost scenario (as it implies a high level of consumer engagement e.g. with smart charging) whereas others see it as the most costly (involving greater uptake of EVs and heat pumps).

At one point, Ofgem was going to set out a central base case the companies should all use but it ducked that one, instead requiring the companies to consider all the FES and Climate Change Committee (CCC) scenarios – with the end result that they have all opted for different base case scenarios and different interpretations of the impacts for DNOs. That will make Ofgem’s job hard as it comes to benchmark across the plans. But on first blush it doesn’t seem that UKPN has taken a very different approach to the baseline versus uncertainty mechanism balancing act than the other DNOs have.

Where the difference seems to come is in UKPN’s emphasis on maximising utilisation of the network – a catchphrase that is repeated throughout its plan. Pushing the network harder means exploiting flexibility, energy efficiency and market mechanisms before undertaking reinforcement. UKPN explicitly argues against the concept of strategic investment given the uncertainty that exists. Of course, all the DNOs say they will make greater use of flexibility but their language tends to be more around optimisation and balancing the use of flexibility and reinforcement, looking ahead to ED3 and the continued growth in network capacity that will be required moving forwards.

Whether this difference in emphasis in the words is reflected in the numbers is hard to tell without any common utilisation metrics or flexibility targets. And utilisation metrics anyway are hard to interpret as the consensus is that when you do reinforce you should provide significant spare capacity. Again, we are dependent on Ofgem to pick through the detail and ensure that we are comparing like with like.

Moreover, there is a really open debate as to what the right approach is and the role for strategic investment. At an individual project level, the ENA has produced a Common Evaluation Methodology that looks to trade off flexibility and reinforcement but it ignores the real option value in flexibility and struggles to deal with energy efficiency as an alternative solution. On the other hand, there are concerns that the Ofgem CBA methodology understates the cost of losses (because it ignores the fact that they are most prevalent at peak times) – and losses increase steeply as utilisation increases.

At a strategic level, Ofgem has been clear that it wants to see the networks maximise utilisation and exploit flexibility – and UKPN is clearly playing to that tune. However, BEIS, the National Infrastructure Commission and the CCC have all at different times emphasised the need for strategic investment, taking a longer-term view of what is required to hit 2050 (or 2045 in Scotland). That debate is key to decisions on the DNO business plans but absent a way of comparing the different approaches that strategic debate is unlikely to happen.

It is not all about load related investment but the other areas are equally hard to unpick. However, as a final simple test of relative ambition one can look at the ongoing efficiency assumed by the companies. This was a battle ground in the GD2/ T2 appeals with the Competition and Markets Authority (CMA) supporting Ofgem’s use of a 1% per annum ongoing efficiency challenge.

Only Electricity North West and UKPN have offered up 1%, with UKPN being clear that it was only doing so because of the CMA and it considers it tougher than historic evidence would support. But it’s hard to see how anything else has credibility after the CMA decision and to propose a lower figure suggests the companies know that Ofgem is going to take a slice at their costs – and perhaps suggests similar “protective padding” will have been applied elsewhere as well. Of the others Northern Powergrid, Western Power Distribution and SP Energy Networks all went with 0.5% and SSEN compromised at 0.7%. Out of the 20 million words those 6 numbers probably say as much as anything about how the companies have approached the plans.

Of course, the plans cover a range of other issues spanning social and environmental commitments, data and digitalisation, whole systems solutions, the distribution system operator role, working with local authorities, and so on.

Across these and other areas the companies have written very many fine words explaining why the issues are important, and how they are committed to making a real difference but – with some exceptions – it can be hard to locate amongst all the narrative what exactly is being delivered. Which brings me back to the question at the beginning – who is the audience for these documents?

For RIIO3, perhaps Ofgem could consider a business plan incentive linked inversely to the number of pages produced (together with a restriction on font size). It was Mark Twain who said he wrote a long letter because he didn’t have time to write a short one. It’s a massive exercise for the companies to produce all this material but it’s also a challenge for the reader. There must be a better way.