Ofgem to adopt new regulatory regime for major grid upgrades

Ofgem has announced plans to introduce a new regulatory regime for strategic electricity transmission projects, whereby network companies will automatically receive funding to develop projects identified as necessary in the Future System Operator’s Centralised Strategic Network Plan.

The regulator said the regime will operate in parallel to the RIIO3 price controls for which networks will no longer be required to submit draft business plans.

The decisions follow a consultation on the future of network regulation launched in March.

Ofgem said the new regulatory model for strategic electricity transmission projects will build upon the Accelerated Strategic Transmission Investment framework, which was introduced by the regulator last year to expedite the delivery of the onshore grid upgrades necessary to achieve the government’s target of deploying 50GW of offshore wind by 2030.

Under this model, the need for projects will be established by the Future System Operator (FSO) through its Centralised Strategic Network Plan (CNSP), with the regulatory approval process being embedded into the FSO’s processes.

Ofgem said it will put in place an interim approach for projects covered by the Electricity System Operator’s transitional CSNP that “mirrors as far as possible the enduring regime proposed for the main CSNP”.

The regulator said the use of the CSNP as the “needs case” to support funding requests will ensure that investments are “underpinned by an independent, cross vector view that has been developed transparently with the support of industry. It will also ensure that industry has confidence as early as possible regarding the future pipeline of new ET [electricity transmission] projects, which will be key to providing the licensees and supply chain with certainty to progress these nationally critical projects.”

Ofgem said the FSO will be able to hold open competitive tenders for the design and delivery of projects if this benefits consumers and does not causes delays. However, the regulator said the majority of projects will continue to be designed and delivered by transmission owners, which will automatically receive funding for the costs of pre- and early-construction work. These costs will be assessed on a “simplified and largely ex post basis”. Ofgem said the competitively tendered projects could be used to help benchmark costs for projects delivered by transmission owners.

The regulator said this will avoid the need for “intensive” ex ante costs reviews during the early stages of development, “where cost risk is lower and there is greatest risk that a lengthy Ofgem process could translate into overall project delay.”

Before moving into the construction phase, transmission owners will be required to demonstrate efficient costs for delivery. Ofgem said it will appoint an independent technical advisor to support its assessments. The regulator will then set cost targets as well as incentives for timely and high-quality delivery.

This “targeted regime” will operate in parallel to the RIIO3 price controls, which will cover other network activities. Ofgem said the price controls will be refined and simplified but will not change significantly. As part of its consultation, Ofgem did consider introducing more ex-post regulation but concluded that this would increase overall costs by weakening incentives. It said the price controls will continue to be characterised by ex-ante incentive-based regulation.

It also confirmed that it will retain a five-year regulatory period for the RIIO3 price controls beginning in April 2026 for gas distribution, gas transmission and electricity transmission. In an open letter in August, the regulator ruled out rolling over the current price controls for gas transmission and distribution by two years to reflect uncertainty over their future.

Ofgem said it will review uncertainty mechanisms to ensure it is able to respond to government decisions on the future of heat during the period. It will also review other elements of the price controls to reflect the likely reduction in the use of gas.

Despite the introduction of a separate regulatory regime for strategic electricity transmission projects, Ofgem said it will continue to calculate a single cost of equity and debt for each licensee.

Furthermore, Ofgem said it will “minimise and streamline” the business plan guidance for RIIO3 to drive “a higher degree of consistency and comparability”. It will also remove the requirement for companies to submit a draft version.

The Customer Engagement Groups for gas distribution and User Groups for gas and electricity transmission will evolve into Independent Stakeholder Groups, which will not only scrutinise the development of networks’ business plans, but also provide ongoing scrutiny of their delivery. The Challenge Groups and open hearings will be abolished following feedback that they are “time-consuming and administratively burdensome.”

Finally, Ofgem said it will support the industry in developing a common data sharing infrastructure, which the regulator said will be necessary to maximise the value of flexibility and strategic and regional planning, and facilitate efficient data sharing between itself and licensees. It said licensees will be required to adopt this infrastructure once operational and share base level data with the regulator at the beginning of the price control.

Akshay Kaul, director general for infrastructure and security and supply at Ofgem, said: “The decision we are publishing today puts an essential building block in place – the framework for the design of future network price controls in the context of long-range system plans across gas and electricity.

“Reform of complementary areas – such as connections policies and network charging rules – is also underway. These reforms will be closely coordinated with the same objective in mind: acceleration of the shift to a net zero energy system at the least overall cost to consumers. This task is now vital and urgent. There is not a moment to lose.”