Ofgem should not ‘pre-empt’ government decision on gas decommissioning 

Ofgem should not “pre-empt” a government decision by using the RIIO3 price controls to fund decommissioning of gas networks, Citizens Advice has argued.  

The charity said “the only progressive and fair way” to recoup these costs is through general taxation as the decarbonisation of the energy system will benefit all energy consumers and the UK as a whole.   

Citizens Advice made the comments in its response to Ofgem’s consultation on the methodology for setting the RIIO3 price controls for transmission and gas distribution.  

The charity said: “The government has yet to make decisions on how and when the gas network will be decommissioned, and how it will be paid for.”  

“Ofgem should not pre-empt any decision by acting in an anticipatory manner, as this risks setting a direction of travel that is then harder to resile from,” it added.  

Ofgem said it does not expect substantial decommissioning costs to be incurred during the RIIO3 period, which will run from 2026 to 2031 for gas networks. However, the regulator said it is also cognisant that the significant decommissioning costs post-RIIO3 “would be borne by an increasingly smaller base of gas network users.”  

It therefore asked stakeholders whether it should introduce “anticipatory” mechanisms to begin collecting some of this funding in advance and “spread the burden” between current and future generations.   

Citizens Advice said the RIIO3 price controls should not be used as a “vehicle” to fund these costs “regressively amongst gas consumers.” The charity said they should instead be funded from general taxation: “The requirement to decommission is directly tied to the transition to net zero which is to the benefit of UK plc and all energy consumers. It is therefore the only progressive and fair way to fund decommissioning, if that is necessary.” 

To avoid the risk of asset stranding, Ofgem has raised the possibility of accelerating the regulatory depreciation of gas network assets to ensure licensees have recovered their full regulatory asset value (RAV) by the time they are no longer needed.  

The regulator has also suggested “smoothing” out the profile of unit charges for depreciation to prevent a large rise in later periods as costs are recovered from a shrinking pool of consumers. It said its modelling indicates this would increase domestic gas distribution network charges by 30% (£35 per year), or 37% (£43 per year) if the RAV was fully depreciated by 2050.  

In their responses to the consultation, gas networks urged Ofgem to apply an uplift to the cost of equity to compensate for the risk of asset stranding, which they said is already being “priced in” by investors. The regulator has said it does not believe this necessary and Citizens Advice agreed.  

The charity also said they “aren’t convinced that the RAV needs to be fully depreciated by a certain date”, adding: “We believe that other solutions can be developed, including funding through taxation. These can be signalled clearly to avoid the perception of asset stranding risk.” 

But Citizens Advice said Ofgem should consider smoothing depreciation to “broadly deliver a flat depreciation charge per consumer.”  

If the RAV were to be fully depreciated to zero before the repurposing of gas network assets, Ofgem said “network would stand to benefit from any subsequent asset transfers.” It therefore asked how depreciation policy should account for this “highly complex” issue, given that it is unclear what proportion of assets are likely to be repurposed.  

However, Citizens Advice disputed the premise of the question, stating: “When the RAV is fully depreciated, investors have been fully remunerated by consumers and so these should be considered consumer assets.”  

It continued: “This would be consistent with using the purchase of assets for repurposing to pay off the residual RAV if the asset value was close to the residual RAV. However, the idea that the value of such assets would be close to the residual RAV appears far-fetched.  

“Purchases would be of the assets, not the RAV, and consumers should receive the benefit for the value over and above the residual RAV. We recognise the neatness of a straight exchange but that isn’t sufficient.  

“Potentially, some incentive could be placed on network companies to dispose of these assets at a good price, but the vast majority of the benefit should accrue to consumers.” 

Gas network responses

Regarding to changes to depreciation, Cadent said it is “important to proceed with caution to avoid unintended consequences.” It said investors are “paying close attention to recent developments, and the way Ofgem positions these issues affects investors’ perception of risk. Ofgem’s decisions must not pre-empt significant government policy decisions that will affect the gas networks.” 

Cadent said any significant changes would be “inappropriate” and bring “the very real” chance of undermining investor confidence. It also argued against the inclusion of a reopener mechanism to make adjustments within the RIIO3 period to account for a government decision on the future of heat: “Regulatory depreciation policy is a fundamental building block of the RIIO framework that cannot be disentangled from other aspects of the price control. It requires a detailed financeability and impact assessment which should only be conducted as part of a full price control review process.” 

The company said it does not expect its business plans to include any materials for either decommissioning or repurposing but said the consideration of how such issues will be managed “cannot be delayed.”  

It said a cross-sector working group, including Ofgem, the government and energy networks, should be established “sooner rather than later” to discuss these issues: “An early exploration and understanding of the different potential future scenarios under which assets may be repurposed or decommissioned, and the appropriate regulatory framework for managing these processes, will help to maintain investor confidence in all regulated sectors”.  

It said: “Given that, in many cases, the decommissioning of assets will be the ultimate long-term counterfactual to asset repurposing, the regulatory treatment of each cannot be considered in isolation.”  

Northern Powergrid said it agrees with Ofgem that the current depreciation profile is unsustainable for ensuring all RAV is repaid by 2050.  

However, the company expressed concerns over the regulator’s proposal to smooth out depreciation charges, which it said would require “a fundamental change” to the regulatory model. 

“Specifically, it would require Ofgem to base today’s customer charges on long-term projections of gas demand volumes or projected customer numbers and ongoing investment to 2050; and it would require Ofgem to set a target closing RAV in 2050 factoring in possible re-purposing value which, as it stands today, is difficult to quantify. 

“These requirements make the proposed smoothed charge complex and potentially arbitrary – introducing more rather than less uncertainty and possible volatility.”  

It said the regulator’s indicative modelling underestimates the bill impact of this proposal. If Ofgem does decide to accelerate depreciation, Northern Powergrid said it should adopt “a more simple and transparent approach”.  

When discussing any changes, the company said Ofgem “must take care to avoid language that suggests it believes the gas sector is in terminal decline” to avoid spooking investors.  

Wales and West Utilities expressed support for smoothing, describing it as “sensible”. It said the regulator should make a decision that can be applied “from the outset of RIIO3”, rather than deferring a decision through reopeners, or “worse” by delaying it until future periods.