Ofgem rules out rollover for gas price controls

The energy regulator has said it is too risky to extend the RIIO-2 price controls for gas networks by two years.

The move was being considered in light of the uncertainty around future development of gas networks, with the government due to make a critical decision on the role of hydrogen in home heating in 2026 – just as the current price control ends. Other key considerations were the whole system benefits of aligning gas and electricity price controls and to allow time for a more fundamental review of how energy network business plans are regulated.

However, Ofgem has now proposed developing a “medium-term” ex-ante price control for gas networks from 2026 based on RIIO-2.

In an open letter responding to its March consultation on future systems and network regulation, Ofgem says it is now of the view that the cost and risks of implementing a two-year rollover outweigh the potential benefits.

The summary of responses to the consultation shows a mixed response to the idea of a two-year rollover, with two gas distribution networks (GDNs) plus National Grid in opposition and two GDNs supportive.

Ofgem says that while there is uncertainty over the future of gas networks investment, the rest of this decade is likely to be “core rather than transformative”, citing priorities such as the iron mains replacement programme, which is due to complete in 2032. It believes totex spend is also likely to remain steady and that any changes to investment requirements could be handled through re-openers.

Therefore the regulator suggests building on the RIIO2 framework to a new ex-ante framework from 2026, saying: “We intend to streamline the process where possible, retaining or removing existing outputs, and only introducing new ones where essential. We will adapt the existing cost assessment process as appropriate. We will consider whether there is a good reason to change the length of that price control from five years during the next stages of the process.”

A framework decision will now be published in the autumn, followed by a consultation on the methodology for the next price control for both transmission and distribution networks. This latter stage will discuss whether some outputs, incentives and uncertainty mechanisms could be removed “without exposing customers and gas network companies to undue risk”.

The open letter also briefly addresses the uncertainty over financing the gas networks. It suggests two ways of mitigating increased risk about the longer-term life of gas network assets. As well as assessing an accelerated depreciation schedule for the next price control, Ofgem also proposes introducing a re-opener should there be reason to change these assumptions mid-price control.

The letter also confirms Ofgem is continuing to work on the regulatory regimes for electricity, with transmission networks due to start a new price control in 2026 and distribution companies in 2028. Its new approach is also due to be unveiled in the autumn.