Flexible price controls will put stress on Ofgem machinery

Ofgem’s proposals to put billions of pounds of potential network investment within reopener mechanisms will raise new challenges for the regulator’s decision-making, its director of network price controls has acknowledged.

Speaking on a special edition of Utility Week’s #AskUsAnything webinar series covering the draft determinations for the RIIO2 price controls, Akshay Kaul admitted that this would “put a particular emphasis on Ofgem’s machinery” and require the regulator to establish new and more agile decision-making processes.

“We’re going to be making lots of big new decisions in every year of the control and we’ve got to make sure we can do that as rapidly as we can,” he said.

Kaul added that he was keen for feedback from the networks on how to make reopener processes accessible and unbureaucratic so they do not feel that red tape is a barrier to bringing forward further investment within the price control period. He said Ofgem is aiming to automate reopener processes but acknowledged that for very large and expensive schemes, this unlikely to be possible.

He said he hopes by December, when the final determinations for transmission, gas distribution and the electricity system operator are due, there will be a “relatively clear set of processes and timings for both the automatic and administrative mechanisms and clarity between industry and the regulator on how they are going to work.”

In the webinar, Kaul also responded robustly to widespread industry protest at the draft determinations Ofgem published on 9 July.

He insisted that the historically low cost of capital set out for the RIIO2 period merely represents a reset to market rates and should not be problematic for investors in the sector.

Kaul said  he thought it “quite normal” for companies to protest their draft determinations and observed that charities and consumer groups have been much more positive in their responses, supporting Ofgem’s approach.

He took issue with complaints that the draft determinations will hinder progress towards net zero, saying: “The very foundation of the design of this control is to get to net zero at lowest cost. If you study the proposals carefully, what we’re essentially saying is that there is potentially unlimited funding available for good value net zero projects.”

During the webinar, which posed pre-submitted questions from Utility Week’s audience, Kaul also defended Ofgem’s decision to issue penalties to most network companies for the quality of their business plans, saying that many had been “unambitious” in what they put forward.

He noted that National Grid in particular had failed to meet the “minimum requirements” set out by the regulator in terms of justifying costs proposals.

And Kaul pushed back on the notion, expressed by a number of network leaders, that the draft determinations showed a disregard for the voice of customer engagement groups in the price control process. He insisted that Ofgem had “consulted closely” with such groups.

An on-demand recording of the webinar is available to listen to here.

Utility Week’s next AskUsAnything webinar will take place at 11am on 7th August and will look at issues relating to work and workforce in the utilities sector after coronavirus.