Ofgem accused of ignoring stakeholders in RIIO2 proposals

Sustainability First has criticised Ofgem over the “apparent disregard” for stakeholder engagement exhibited within its draft determinations for RIIO2.

It warned the failure to acknowledge the work of both stakeholders and networks companies could discourage them from devoting time and resources to the process in future.

The charity and thinktank made the comments in its response to Ofgem’s draft determinations on the price controls for electricity and gas transmission, gas distribution and the electricity system operator, which were published in July.

After first noting the involvement of its members and associates in the Ofgem’s RIIO2 challenge group and several of the network companies’ customer engagement groups, Sustainability First said it is “very concerned” at the “limited emphasis” the regulator appears to have placed on consumer and stakeholder input.

“Beyond commenting on the requirement for companies to meet the minimum standards on enhanced engagement – which they all do – Ofgem gives no view on which of the eight companies have done better in terms of engagement in developing their business plans,” it explained.

Sustainability First said the RIIO2 challenge group found a “wide variability” in the standard of engagement but that Ofgem has given “no sense” whether it agrees with this assessment: “For companies who have gone the extra mile in using engagement to shape and improve their business plans, there is no recognition, financial or reputational. This provides no incentive for companies to put effort into doing any more than the minimum going forward.”

The charity continued: “This apparent disregard for stakeholder engagement also comes through in the decisions that Ofgem has taken on the range of bespoke outputs that companies have proposed. The fact that there was strong stakeholder support for particular initiatives does not seem to have been a consideration in Ofgem’s decisions.

“Where Ofgem dismisses proposals that have been developed with significant stakeholder input there is a risk of discouraging stakeholders from engaging in future. Of course, Ofgem cannot be expected to simply accept all proposals that have stakeholder support but there is an onus on Ofgem to consider that evidence and to explain more fully than it has done why it has decided to over-ride stakeholder views.”

Sustainability First said this is particularly important for proposals developed in direct response to the input from customers and network users: “These groups – often involving senior, experienced people – have devoted significant time and have closely scrutinised the proposals and the underlying consumer and stakeholder evidence. Ofgem needs to show how those inputs and those of the Ofgem challenge group have been given due weight in their decisions.”

There was “no recognition” of the role gas transmission and distribution will need to play in helping local authorities to develop local area energy plans.

In some areas, particularly on vulnerability and customers within the gas distribution sector, the charity said: “Ofgem seems to have decided that national standards are more appropriate to avoid what it sees as a postcode lottery and has rejected proposals from the companies that they have developed with their stakeholders.

“This is confusing and a waste of time and resources. If local variation is ultimately not seen as acceptable in this area, then Ofgem would have been better signalling that at the outset and saving significant effort on the part of the companies and groups.”

Sustainability First was more positive about Ofgem’s approach to delivering the net-zero emissions target, saying it warmly supports the proposed changes to innovation funding and that it understands why Ofgem has chosen to rely heavily on uncertainty mechanisms.

However, it also expressed a number of concerns over how these mechanisms will work in practice.

The thinktank said Ofgem must be “geared up” to make timely decisions during the course of the price controls: “While Ofgem rightly has ambitions to be more agile, and has had that as a goal for several years now, it is easier said than done given the scrutiny and consultation that is required. A clearer articulation is needed of how Ofgem will achieve this and the timescales it will be working to.”

It said the regulator also needs to recognise that some uncertainties will not go away: “The implicit assumption in the framework of uncertainty mechanisms is that there will come a point at which the uncertainties will be resolved and reopeners can be employed.

“On some issues, clearly there is a timing angle. As Ofgem rightly says, policy does not develop in five-year cycles aligned to RIIO. However significant uncertainty, and complexity, will always remain. Given the lead time for major infrastructure investment, the levels of future demand will always be uncertain.”

The response cited the example of the project to install a transmission connection to the Shetland Islands, “where Ofgem declined to provide funding unless it was certain that the generators had CfDs [Contracts for Difference].

“At the same time the generators were struggling to get CfDs because it was not clear that the network capacity would exist. Finding ways to deal with the enduring uncertainty and ‘chicken and egg’ situations needs to be a part of the adaptive regulation toolkit.”

Rather than taking an “all or nothing” approach to decision making, the regulator instead needs to consider the value of optionality. The risk of assets being stranded must be weighed against the risks of delay.

“Overall, we strongly support Ofgem’s idea of ‘adaptive regulation’ and consider this is absolutely a move in the right direction. However, if it is to be the big idea reshaping regulation then it needs a stronger intellectual underpinning and clearer articulation, as well as a mindset shift on some issues.”

On the topic of the environment, Sustainability First additionally noted that “rather less emphasis” has been put on network companies’ own emissions. Whilst they have all set out science-based targets as required under the price controls, the charity said Ofgem has not acknowledged the variations between them: “As a minimum Ofgem should require the companies to make clear what level of science-based targets they have signed up to and to give credit to those who are more ambitious.”

It said it is particularly concerned that the regulator has instructed gas distribution network to exclude leakage from their targets, adding: “This appears to run counter to the formal guidance on the definition of scope 1 emissions within science based targets as including fugitive emissions.”

With regards to incentives, Sustainability First said the regulator has “scaled back significantly” on the rewards available to network companies, adding that “even where financial incentives are used, Ofgem has put more emphasis on the use of penalties”.

The organisation said this makes sense in some instances, but warned there are several risks, namely that companies will “cease to focus on the outputs that may be important to customers” or alternatively spend too much if the incentives are incorrectly calibrated with customer preferences.

“The basis on which Ofgem has set the target levels and incentive rates seems largely arbitrary,” it added. “There seems to be no consumer research commissioned by Ofgem to underpin Ofgem’s decisions on incentive structures, except arguably on value of lost load in electricity transmission.”

Furthermore, the charity raised concerns over the increased reliance on reputation incentives to ensure the delivery of some outputs: “If the final price control proves to be as tough as Ofgem is signalling, then the companies will be under pressure from shareholders to limit the discretionary activity they undertake.

“We have seen this already in the water sector with companies pulling back from commitments made in their business plans – endorsed by their customer challenge groups – and which they say are no longer viable.”

It said the regulator must do more to ensure reputational incentives are actually effective.

The relevant network companies are due to release their responses to Ofgem’s draft determinations this Friday (4 September).