Citizens Advice response to the Ofgem RIIO-ED2 Draft Determinations consultation
The Ofgem RIIO-ED2 (ED2) Draft Determinations outline Ofgem’s draft decisions for the price control for the electricity distribution sector. This price control is set in an environment of a simultaneous cost of living crisis and a drive by the government to achieve its net zero goals. Ofgem needs to ensure that this price control delivers for consumers by ensuring that companies can meet people’s requirements to connect their new electrically-powered technology while also keeping costs for consumers as low as possible. Ofgem must not repeat the errors of the past price control where companies were unduly rewarded.
While we can see progress in these Draft Determinations towards a more responsive price control aiming to deliver those two aims of meeting consumer demand needs and keeping costs low, we still think that there is more to do for consumers. The main areas where we believe improvements are required are:
Cost of capital is too high. The overall approach to cost of equity over-estimates the level of returns required and detailed decisions favour the network companies. The clear evidence provided, including through the cross-checks performed, that the cost of equity is too high has not been acted on. Cross-checks indicate consumers could pay over £1.5 billion more than needed across ED2. Ofgem should reflect this evidence when making judgements on elements of cost of equity.
Incentive targets are not challenging enough. There are multiple occasions where incentive targets favour the network companies with outperformance and rewards too easy to achieve. These should be recalibrated to ensure only genuinely good performance is rewarded.
Baseline allowances for load-related expenditure may be too high. The allowances may be overly generous given that electricity demand may not be at the levels that the companies expected when they put forward their plans. Factors suppressing demand could include people cutting back on usage due to the high cost of energy, people and businesses delaying purchases of electric vehicles or heat pumps due to affordability concerns, and people moving their demand so that peaks are not as high as expected. How baseline allowances have been set should be reviewed.
The value of flexibility is not fully reflected. We are also concerned that the Draft Determinations will not provide the correct incentives for the use of flexibility services to better manage demand in the distribution energy system. The potential value of flexibility services does not seem to be reflected in either baseline allowances or the uncertainty mechanisms to meet new load requirements. The checks and balances built into the price control which are supposed to encourage the use of these flexibility resources may not be sufficient.
The extent of regional variations is not justified. The various strategies that underpin the Business Plans have, broadly speaking, been accepted in their entirety. This will lead to customers receiving very different outcomes depending on which DNO region they live in. We do not believe such significant variation is justified by differing consumer needs and preferences. Ofgem should identify the areas where best practice and common ambitions, revealed through the Business Plans, should be implemented across the networks.
The risks to consumers are clear, especially those least able to afford higher bills. Over-high cost of capital allocations could overpay companies as in the past. While too generous baseline allowances and a focus on traditional infrastructure could mean consumers are left paying for so-called ‘stranded asset’ investments that may not be needed for years to come or may never be needed.
Read our detailed responses below:
Overview and Core Questions Response 493 KB