Ofgem publishes final determinations for RIIO2

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Today Ofgem has announced a £40 billion into the national grid and infrastructure as the regulator has published their settlements for the next network price control, known as RIIO-2.

This funding consists of £30 billion upfront funding to companies and £10 billion on standby for green projects.

Network companies run the pipes and wires that transport gas and electricity around Britain. They are funded through consumers’ bills, via five-year price controls set by Ofgem.

The RIIO-2 will come into force next year, running for the next five years.

Ofgem has made the following key changes since its July draft determinations, following 22,000 pages of further evidence:

  • Allowed return on equity 4.30% (a 4.55% cost of equity, when taken together with expected 0.25% income from quality / cost incentives) – increased from 3.95% at draft determinations.
  • £30 billion upfront funding to companies, increased from £25 billion at draft determinations.
  • £132 million funding for vulnerable consumers, doubling to £60 million the vulnerability and carbon monoxide safety allowance from draft determinations.

Ofgem’s Chief Executive Jonathan Brearley commented on the announcement: “Our £40 billion package massively boosts clean energy investment.

“This will ensure that our network companies can deliver on the climate change ambitions laid out by the Prime Minister last week, whilst maintaining world-leading levels of reliability.

“These costs must fall fairly for consumers. We are reducing the amount paid to shareholders so that they are closer to current market levels.

“This means that companies can attract the vital investment we need whilst making sure that consumer don’t pay more than is necessary to achieve this.

“We are also ensuring that £132 million is earmarked to support the most vulnerable in society, including carbon monoxide initiatives and funding new connections for those most struggling with their bills.”

Following its challenge to them, companies submitted evidence on their spending plans which enabled Ofgem to green-light more funding for crucial service, maintenance, upgrades and repairs.

Ofgem is also making unprecedented additional funding available for future green energy projects that companies propose over the next five years, aimed at eliminating emissions from the energy system.

Companies have indicated that £10 billion of such projects could be in the pipeline, such as reinforcement along the East Coast of England to anticipate 40GW of offshore wind in the North Sea.

However, there is no limit on the additional funding that could be provided, subject only to companies making good business cases.

Ofgem has stated its commitment to work with companies and stakeholders to streamline its processes so that companies get funding without delay, when and where it’s needed.

The regulator has stated that customers will also see a £2.3 billion saving over the course of RIIO-2, equivalent to an average bill reduction of about £10 before inflation.

The regulator has secured this by demanding greater efficiency from companies and lowering returns to shareholders by 40% to bring them in line with current market levels.

As investment in green energy transformation rises over the coming years, this will make sure costs are kept as low as possible for consumers.

Meanwhile, in a separate price control, Ofgem is boosting funding for the electricity system operator to ensure that it stands ready, as soon as 2026, to operate a zero carbon emissions electricity system.

David Smith, Chief Executive of Energy Networks Association, responded to Ofgem’s announcement: “Delivering the Prime Minister’s Ten Point Plan for a Green Industrial Revolution, keeping energy flowing to homes and businesses, and achieving Net Zero emissions requires sustained investment, innovation and a supportive and forward-looking regulatory regime.

“We will be studying the detail of Ofgem’s determination over the coming weeks to ensure it stands up to these challenges.”