Ofgem’s finally listening

In her latest column exclusively for Utility Week members, former Ofgem executive Maxine Frerk gives her views on the RIIO2 final determinations for gas and transmission companies. She highlights signs that the regulator has listened to stakeholders but also areas that remain unresolved.

While the companies will take their time to work through the detail of the final determinations, and in particular the scale of the efficiency challenge and the cost of capital, stakeholders will generally be pleased that after draft determinations it does finally feel like Ofgem are listening.

Akshay Kaul, Ofgem’s networks director, has argued that the Consumer Engagement Groups (CEGs) and other groups’ input was highly valued and that the problem was simply that they didn’t write an essay in draft determinations on how it had shaped their thinking – which they have done in final determinations.

But, I think it runs deeper than that. Ofgem have now responded – and there is much to welcome in the final determinations – but perhaps if they had been listening more, earlier they might have had time to tackle some of the knottier issues that remain unresolved.

For vulnerable customers, Ofgem has moved in response to concerted lobbying from consumer groups, CEGs and Ofgem’s own challenge group to do more, in particular given the impacts of Covid.  Ofgem has doubled the use-it-or-lose-it pot so that £60 million will be available to support customers in vulnerable situations. It has also broadened the scope of support that can be provided (eg to include boiler repairs / replacements in certain cases) and agreed an additional bespoke Cadent initiative in this area. That is all excellent news.

However, there is still the niggling question of energy efficiency which Ofgem says cannot be funded. Unlike in electricity where demand-side measures are all the rage to avoid reinforcement, it doesn’t seem to have made it onto Ofgem’s radar for gas despite stakeholders arguing that it has a synergy with the GDNs’ role and that – as we all know – it is crucial to achievement of our net-zero targets. Funding will still be provided for fuel poor network extensions encouraging the continued uptake of gas for heating and with no expectation that energy efficiency will be improved in parallel.

On net zero Ofgem has moved in response to pressure from some user groups and environment groups, as well as the companies themselves, to include more investment in the baseline for transmission and to make the re-opener process more streamlined to facilitate approval of additional funding in-period. It has also introduced a new use-it-or-lose-it pot and a re-opener for pre-construction work and early development projects that wouldn’t qualify for the current innovation schemes – filling a crucial gap on both transmission and gas distribution. Investment to develop a hydrogen pipeline for an industrial cluster has been included in Cadent’s baseline funding and the Network Innovation Allowances have been increased slightly with the potential for companies to come back for more if needed in-period to support hydrogen development. This is all excellent news and demonstrates Ofgem’s commitment to the net-zero agenda.

However, there is still no overall sense if whether what Ofgem has now included in its final determination goes far or fast enough when viewed against the net-zero pathways from the Future Energy Scenarios – or those just produced by the Committee on Climate Change (CCC). Ofgem’s Impact Assessment sets out the bill impact of its decision but not the carbon impact. And the proof of the pudding will be in the eating when it comes to whether Ofgem can be agile and pragmatic in dealing with the plethora of new uncertainty mechanisms it has put in place.

Finally, on the Environmental Action Plans Ofgem has opened the door for the other transmission companies (but not gas distribution) to get an NGET-style financial incentive around an environmental scorecard to encourage them to meet and exceed the targets in their plans. Additional allowances have been included for SF6 asset replacement on transmission and a bespoke output around leakage management from SGN. The regulator has also put in place an incentive around low carbon commercial vehicles. And there seems to be an assumption that companies will actually sign-up to the rigorous process of getting their science-based targets certified by the Science Based Targets initiative – although it’s not clear if Ofgem is actually requiring that.

So, much to welcome on that front too. Indeed, Ofgem has agreed to almost everything that stakeholders have proposed in this space but one still gets the feeling that Ofgem isn’t really interested in these short-term carbon impacts. One frustrating example is the consistent failure to engage with leakage on gas distribution. The regulator notes in final determinations that an environmental group has highlighted the need to distinguish between leakage and shrinkage because of the differential environmental impacts (as shrinkage also includes own use of gas, for example, whereas unburned methane is a potent greenhouse gas). Ofgem says it agrees but then goes on to describe the “shrinkage incentive” as being “calculated based on the change in leakage”.

In its sixth Carbon Budget report, the CCC says: “Methane leaks from the gas distribution and transmission networks are reduced in the Balanced Pathway using a combination of Leakage Detection and Repair (LDAR) technologies and continuous monitoring technologies, resulting in 3.5 MtCO2e/year in 2035”. Without Ofgem taking a bit more interest in this area that will not be achieved. Ofgem makes no reference to measurement and monitoring. It may not be easy but stakeholders have been flagging the issue since the start of the RIIO2 process.

Overall then there is a huge amount to welcome in terms of the outputs that Ofgem has set to be delivered in RIIO2. It has moved a long way in a short time and will hopefully have left stakeholders feeling that ultimately they were listened to.

Hopefully too Ofgem has come to value the breadth of experience and expertise that the CEGs, user groups and challenge group can bring – including their ability to channel and amplify the voices of an even wider set of consumers and stakeholders.

On many issues the CEGs and user groups were supporting the companies’ requests around additional outputs. That might look like capture but actually reflects the fact that companies have largely responded to what the groups were arguing for as reflecting consumer needs and wants.

Ofgem has said it is reflecting on the value add of the CEGs and user groups and whether they should have an enduring role. In my view they clearly should.