SPEN threatens CMA appeal if Ofgem doesn’t budge

SP Energy Networks (SPEN) has warned Ofgem it could appeal to the Competition & Markets Authority (CMA) over the regulator’s “manifestly flawed” take on its business plan for the next price control.

The electricity transmission company has demanded a revised draft determination by early October correcting what it claims are mistakes on Ofgem’s part and reversing a £15 million business plan penalty.

It points to “a range of material errors and inconsistencies” in the draft determination on its business plan for 2021 to 2026. It claims Ofgem used a flawed benchmarking approach to adjust totex allowances and that its proposed ongoing efficiency stretch is not supported by evidence.

It also bluntly states that Ofgem’s uncertainty mechanisms package will fail to deliver net zero and damage the green recovery. This point was echoed by Renewable UK and SSE in their responses.

The proposals “undermine the financeability of electricity transmission by cherry picking arguments”, SPEN insists. It says Ofgem’s views on the cost of equity are “divorced from the real world and do not represent the reality faced by investors”.

While stressing that its preference is to work constructively with Ofgem to resolve its differences, SPEN says it has been advised the determination “is clearly appealable to the CMA”.

Frank Mitchell, chief executive of SPEN, which is part of the Scottish Power group, branded Ofgem’s approach “a missed opportunity to create job opportunities and wider economic benefits across the energy sector for the UK”.

He said: “The returns Ofgem has proposed in the RIIO-T2 draft determination are the lowest in UK history for this sector and well below those available against comparators who are competing to attract similar investment such as the US.

“We believe that Ofgem’s draft determination will not deliver the Green Economic Recovery at pace to support the UK and Scottish governments’ ambitions to build and invest in response to the economic impact of Covid pandemic.

“The expenditure adjustments and nature of the uncertainty mechanisms proposed by Ofgem do not provide investors with confidence and will ultimately slow down the ability for new renewable generation to be connected, thus directly hindering government targets for net zero.”

In its response, SPEN highlights a number of specific “errors and inconsistencies” in Ofgem’s cost assessment programme. It points out that in several cases projects have been approved but the funding for them has been reduced or in some cases removed. It cites its Net Zero Fund as one such initiative, which has been approved in the draft determination but had its £20 million cost obliterated. It also says that 75 per cent of allowances for risk management of its engineering projects have been cut, which it insists makes it impossible to carry them out safely.

It also accuses Ofgem of not taking into account embedded efficiencies within its business plan and as a result “double counting” in its calculation of additional efficiency stretch.

SPEN claims that Ofgem’s approach to the business plan incentive is contradictory, having told SPEN prior to the publication of the draft determination that the plan was high quality and then imposed a £15 million penalty. It points out that 96 per cent of its expenditure is “competitively tendered” and that costs are evidence driven and therefore the use of an “arbitrary” classification of costs as high or low is “irrational”.

It goes on to say: “Ofgem’s approach lacks transparency and has the perverse result of penalising precisely the innovative and ambitious proposals that the business plan incentive was ostensibly designed to encourage.”

SPEN is contracted to connect over 5GW of renewable generation over the course of the five years. It says only projects where there was a high degree of confidence they would materialise in RIIO2 were included. For other projects, SPEN proposed uncertainty mechanisms – a move it claims it consulted Ofgem on and received a positive response. It says Ofgem rejected these mechanisms without giving clear reasons and has substituted “poorly designed” replacements which “will likely materially delay projects that are critical to the achievement of net zero”.