The cost of everything

In her latest column exclusively for Utility Week members, Maxine Frerk delves into the Ofgem Challenge Group reports on the business plans of the electricity distribution network operators. They assess the networks' strategies around distribution system operation, vulnerability and emissions reductions.

Having battled through the RIIO ED2 Business Plans trying to make sense of numbers that were impossible to compare, I was looking forward to the Ofgem Challenge Group report. The Challenge Group have the benefit of seeing all the formal Business Plan Template data that the companies provide to Ofgem which therefore ought to be on a consistent basis.

As expected, the Challenge Group report does indeed provide a helpful series of comparative cost tables looking across the distribution network operators (DNOs). They also do a simple traffic light rating for various aspects of the company plans. This provides a very quick overview of the relative merits of the different plans and a basis from which to probe further.

That said I have always been wary myself of such ratings precisely because they present a necessarily simplistic picture of what can be complex issues. Anyway, no surprises what this shows – UK Power Networks (UKPN) come out well ahead of the other DNOs with an almost clean sweep of green ratings. Among the others it’s hard to split the pack – although SSEN does seem to have been marked down for having higher costs than the others across almost all areas.

For the most part the elements that have been scored are the different cost categories in the business plans. In practice the ratings seem based primarily on the extent to which costs have increased over ED1. That’s perhaps a sensible place to start, but still leaves unanswered the question that I posed in my last article as to whether elements of UKPN’s costs in ED2 are lower because you are getting less anticipatory investment in the network, leaving more to do in ED3. The Challenge Group do try to look at, for example, network utilisation and how the companies expect ED2 peak loads to increase against ED1 but the numbers are hard to interpret and so they are left passing this back to Ofgem to explore further.

Looking beyond the cost analysis, there are some areas where the Challenge Group are essentially providing a judgment on the outputs being delivered – on distribution system operators (DSO), vulnerability and the Environmental Action Plan. In places it could be clearer what that judgment is based on – and in some areas where I have scrutinised the plans carefully for Sustainability First, I am left questioning the Challenge Group’s scoring.

On DSO the Challenge Group set out a number of criteria they have considered and UKPN scores highly across the piece, including for its clear plans around separation. In practice, a proper debate is still needed on how far and at what pace the separation model is the right one for distribution.

On vulnerability UKPN scores highly for its ambitious target for priority service register (PSR) customers as a proportion of those eligible. But there is not yet a consistent way of measuring PSR eligibility across companies so there is a risk of comparing apples and oranges.

Reducing emissions

And finally, on the Environmental Action Plan, UKPN score highly, along with SP Energy Networks (SPEN), seemingly down to their numeric targets for reducing their scope 3 emissions (ie their emissions from their supply chain). In our Sustainability First deep-dive on the EAPs we caution against placing too much weight on such metrics in ED2 as work is still needed for all manner of companies on baselining of scope 3 emissions (including on embedded carbon).

Indeed, we highlight in our response that SPEN does not yet have an accredited target for its scope 1 and 2 emissions and that UKPN only has a target based on meeting “well below 2 degrees” rather than the “1.5 degree” target that is now required as standard by the Science Based Targets Initiative (SBTi). Other DNOs with accredited targets all align to 1.5 degrees. UKPN look good for committing to review their target mid-period but the reality is that they only need to do this because their current target is inadequate.

There is also a need to take account of the new Net Zero Standard that SBTi introduced in October which talks about the role of offsetting – requiring any offsetting to be separately identified with “no net zero claims until long term targets are met”. Only Scottish & Southern Electricity Networks (SSEN) seems to have written its plan with that guidance in mind whereas UKPN, SPEN and Western Power Distribution place heavy emphasis on a headline “net zero” target in ED2 that excludes losses and relies (to an undisclosed level) on offsetting. In our view Ofgem was right to require the companies to have targets accredited by SBTi and the focus should be on that, to avoid the smoke and mirrors of these various “net zero” claims.

One other reason for Sustainability First wanting the focus to be on the totality of scope 1 and 2 emissions is our wider concern that losses are being neglected in the ED2 process. They currently account for 6-7% of electricity generated (equivalent to around £15pa for the typical customer) and around 90% of the DNOs’ carbon footprint – so are important in terms of both costs and carbon.

However, Ofgem has bought the companies’ arguments that losses will increase over time as loads increase and that this is very largely outside the DNOs’ control. Our argument is that the trend towards rising losses is a reason why this area needs more focus, not less. And the Losses Strategies buried deep in the appendices to the business plans reveal that there is actually a significant amount that the companies could do to better understand and manage losses. What concerns us is that without any financial incentive to focus on this issue, the companies will not give it the attention it needs as they move into ED2.

The other argument that gets made is that losses will cease to contribute to the companies’ carbon footprint as the grid decarbonises. This wouldn’t be seen as a reason to reject other energy efficiency measures so it should not be one here. Losses are a whole systems issue and need to be viewed as such in terms of the implications for the levels of system capacity needed to meet net zero.

Another similar issue is SF6 where again we have argued that stronger incentives are needed to ensure the companies deal effectively over the long-term with the 200,000 bits of equipment on their networks containing small amounts of this highly potent, long lived greenhouse gas.

Unenviable task for Ofgem

In our response we were unable to produce any sort of relative ranking of the companies – not least because for most of the areas we have focussed on there is still a huge problem with a lack of comparable data.

As ever I don’t envy Ofgem the task of wading through all this material and trying to benchmark the plans – but hopefully the Challenge Group’s useful report and Sustainability First’s in-depth review of the Environmental Action Plans will help them.

Clearly this is a challenging period for Ofgem and the focus will inevitably be on keeping bill impacts to a minimum. But there needs to be a focus too on what is being delivered. All the plans showed very strong support from customers and stakeholders for action in support of net zero and the environment. The recent storms have only reinforced the importance of resilience and climate adaptation. In moving to draft determinations, Ofgem must retain its focus on delivering the long-run outputs that consumers want and need, and must not just look at the near-term cost, even if that is, in many ways, the easy bit.

Maxine spent 15 years at Ofgem, latterly taking on responsibility for all aspects of the regulation of distribution networks. Since leaving Ofgem she has been working as an independent consultant for a mix of regulated company and consumer / community group clients and is an associate at Sustainability First.