Ofgem ordered to redetermine Northern Powergrid ED2 spend

The Competition and Markets Authority (CMA) has ordered Ofgem to redetermine Northern Powergrid’s business plan for the RIIO-ED2 price control.

It comes after the distribution network operator (DNO) appealed Ofgem’s final determination on the grounds that the regulator had misallocated allowances between cost categories resulting in Northern Powergrid’s North East and Yorkshire businesses being underfunded to the tune of £171 million.

In particular, the DNO has taken issue with the way costs have been allocated for the uptake of low-carbon technologies such as electric vehicle charging points, heat pumps and batteries.

In its final determination, the CMA has ordered Ofgem to review its initial assessment. It adds: “Given the complexity of the matter, and the fact that [Ofgem] has been through the price control process with the industry, our view is that [Ofgem] is better placed to take the necessary remedial action.

“Therefore, our view is that it would not be appropriate for us to substitute our decision for that of [Ofgem] (to the extent that the appeal is allowed).”

Northern Powergrid also appealed the decision on the grounds that Ofgem had wrongly failed to grant the firm an ‘incentive stage 4’ reward when it should have done. The CMA, however, dismissed this ground for appeal stating that Ofgem “was not wrong” in its assessment.

Stage 4 reward is designed to reward DNOs that provide information about their projected costs that aids Ofgem in setting accurate price controls for the sector based on efficient costs.

A spokesperson for Northern Powergrid said: “We welcome the news from the CMA this morning. Once finally resolved, this will enable us to plug the gap in our ability to access our cost allowances that Ofgem set in the price control so that we can invest to facilitate the regions’ decarbonisation goals, as well as deliver significant service improvements.

“This appeals process is an important part of the overall price control regime and is run very professionally. The relationship between our team and Ofgem’s has been positive throughout and we’d like to thank the teams involved in the process for the significant amount of work carried out to get to this point.”

Meanwhile, Ofgem interim director for network price controls Steve McMahon said: “Northern Powergrid’s appeal against the RIIO-ED2 price control focused on two narrow but important technical points. We note today’s final determinations by the CMA which has found in favour of Ofgem on one ground and asked for reconsideration and redetermination on the other.

“We will now carefully consider the CMA’s conclusions in determining next steps to finalise the RIIO-ED2 price control. Our focus remains on securing the energy infrastructure needed for a net zero future but doing so in a way that will always protect the interests of energy consumers.”

In November 2022, Ofgem approved £22.2 billion of investment by electricity distribution networks over the five-year ED2 price controls beginning in April.

The final determinations represent a £2.9 billion decrease when compared to the total expenditure (totex) allowances requested by distribution network operators (DNOs) in their business plans but a £1.3 billion increase when compared to the regulator’s draft determinations published in June last year.

All other DNOs have accepted their final determinations.

Following Northern Powergrid’s appeal, Citizens Advice argued that allowing the appeal would grant Northern Powergrid “significant additional revenue, to be funded by consumers, without any related improvement in service or investment”.