Ofgem ‘gamble’ to cut DNO budgets puts net zero target at risk

Ofgem took a “big gamble” by cutting the distribution networks budgets in the latest ED2 investment round, potentially putting UK efforts to decarbonise the grid at risk, a new report has warned.

The report, entitled Building an Electricity Network for Net Zero by the energy expertise centre Regen, describes the government’s target to decarbonise the grid by 2035 as achievable.

However it warns that transformation of the grid requires a “clear strategy and focus on delivery” with a priority on moving from action plans to reform and investment at pace.

It says the pace of investment and innovation in the distribution networks is not yet fast enough.

In particular, the report criticises Ofgem’s decision to cut the final budget allowances for reinforcement work, compared to the sums submitted by the distribution network operators (DNOs) in their 2023 to 2028 business and investment plans, which it says were designed to provide capacity ahead of need.

“If Ofgem’s gamble backfires they will have put net zero at risk,” it says, adding that Ofgem must ensure that the regulatory framework enables DNOs to invest strategically for net zero.

In November 2022, Ofgem approved £22.2 billion of investment by electricity distribution networks over the five-year ED2 price controls beginning this April, £2.9 billion less than the DNOs had requested in their business plans. Northern Powergrid has appealed to the Competition and Markets Authority against this final determination.

Regen also says the DNOs need to step up their own pace of change on strategic planning, digitalisation and development of their supply chains.

But it urges the government to commit to electrifying heat because while it is “increasingly clear” hydrogen will play a “limited role” in home heating, until there is a clear decision it is difficult for networks to fully plan and invest for the electrification of heating through heat pumps.

The report also calls for a reform to the approach governing interactions between transmission and distribution networks, which it identifies as a “critical barrier” for connecting new generation.

The report’s other recommendations include investment in the grid, which is falling behind the government’s target to deploy 50GW of offshore wind by 2050.

The report’s author, Frank Hodgson at Regen, said: “We are in a race to develop renewable power and electricity storage to meet our net zero goals and tackle high bills caused by the UK’s reliance on fossil fuels, but delayed investment in the electricity network is leading to clean energy projects not getting a connection date for 15 years.

“Recent commitments to drive forward progress from the government and the regulator are encouraging but the priority now is moving from action plans to delivering reform and investment at pace. This report sets out the scale of the challenge to upgrade our electricity networks, the initiatives underway and the key priorities to ensure network infrastructure is not a barrier to net zero.”

Responding to the report, an Ofgem spokesperson said: “It’s not how much you spend. It’s whether you spend it well.

“We’ve unlocked £22bn investment for cheaper, cleaner more reliable grids at no extra cost to consumers – the whole cost of the net zero transition cannot be loaded onto households. That’s not a gamble, that’s the right thing to do”.

“The energy crisis means it is unconscionable to expect us all to pay more without us telling network owners to do more for less – cutting profit margins, reducing underspends and getting projects done on time and on budget.”