RIIO2 price controls have been ‘set up to fail’

Ofgem’s efforts align the next of set network price controls with the UK’s net-zero emissions target have been “set up to fail” due to insufficient guidance and support from government.

Catherine Mitchell, professor of energy policy at the University of Exeter, said the lack of clarity over how the target should be achieved and the absence of appropriate roles and institutions mean the regulator’s proposals were inevitably going to be “very disjointed”.

Writing in her response to Ofgem’s draft determinations on the RIIO2 price controls for transmission, gas distribution and the electricity system operator, Mitchell said the regulator usually “says the right things” with respect to climate change and the environment but “they rarely go further and put incentives in place which will deliver those ‘right’ stated points.” She said its draft determinations represent a more successful attempt to “granularize” these overarching aims.

“However, unfortunately, in order to deliver outcomes, more needs to be said about what outcomes are wanted by when, and how they are to be assessed; what institutions and roles will be required to deliver those outcomes; and what incentives are needed to deliver those outcomes, given those institutions and roles.”

Mitchell said the governance framework required to deliver net zero emissions is not yet in place and has “not so far been deeply and widely addressed”. She said the main fault does not lie with Ofgem and instead pinned the blame on the government, in particular, the Department for Business, Energy and Industrial Strategy (BEIS).

She continued: “The document’s incentives, by their nature, are not going to be helpful for anything other than fundamentally continuing the not-fit-for-purpose governance framework and the more or less business as usual activities.”

As a result of these constraints, Mitchell said the proposed incentives are “strangely siloed” from each other, “ignore major policy decisions” that must be taken by government and fail to actually encourage the creation of a net-zero energy system – “the very thing it sets out to do.”

However, she did criticise Ofgem for not being “more vocal and transparent” about the bind it finds itself in: “The decisions which Ofgem takes continue to make the decision lag in the energy system greater. The relationship between BEIS and Ofgem has to alter and Ofgem’s roles and its duties have to change”.

“It is hard to take big decisions – particularly when there appears to be no guidance from government that it would be welcomed,” she concluded. “But Ofgem is in a new place with a new chief executive. Now is the time to try and make a shift change in our energy governance for the benefit of customers and, more broadly, UK plc.”