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RIIO BRAVO

IGEM recommends more ‘holistic’ approach in
response to Ofgem RIIO-2 consultation

GEM has responded to Ofgem’s IGEM has called for value for money whole system approach when it comes
consultation on the RIIO-2 business to be one of Ofgem’s overarching to driving innovation and collaboration
plans for gas networks, saying the themes for the price control, not just within the whole energy system.
regulator needs a more holistic part of the business plan incentives. “Ensuring whole system approaches
I approach to price controls. There is currently an annual totex are effective can bring major benefits
The institution has expressed sharing mechanism and to constrain to both existing and future consumers.
concerns over Ofgem’s package network rewards further by changing Therefore we would suggest this could
of recommendations, questioning outputs targets annually would lead be a key area for incentives that reward
the rationale behind some of the to an unbalanced risk and reward progress in this area. We would propose
regulator’s decisions. outcome for networks over the period. that Ofgem keeps this area open for the
IGEM’s Head of Technical Services & A longer regulation period would be development of new incentives across
Policy Ian McCluskey said: “The gas and better suited to investment planning sectors where they can support delivery
electricity networks are essential to the as well as training and innovation. of consumer value.
functioning of society and our economy. “Whilst we welcome Ofgem’s “Accordingly, whilst we support the
Generally, we support the headline clarification on the scope of whole approach to whole system solutions we
principles and many of the proposals energy systems, we believe that the also would encourage Ofgem to maintain
in the consultation document and the scope is too narrow and as such limits the focus on the more pressing challenge
objectives Ofgem is trying to achieve. some of whole systems considerations of supporting the identification of the
“In particular, we are pleased that that may be applied to the gas least cost decarbonisation pathway.
Ofgem recognises the critical role network,” said Mr McCluskey. “It is our view that RIIO-1 has worked,
the gas networks will play during the and that it has delivered strong consumer
energy transition. The integration of It is our view that RIIO-1 benefits - improved safety, improved
the gas and electricity networks over customer service, and improved
the coming years is crucial to helping has worked, and that it has efficiency. For every process innovation
deliver the whole systems energy delivered strong consumer or efficiency improvement achieved
system of the future. benefits - improved safety, by RIIO-GD1, the net benefit to the
“However, we believe that the overall improved customer service, and consumer exceeds the net benefit to the
package of recommendations needs to network before the end of RIIO-GD2. The
address this area more holistically in improved efficiency. For every consumer carries on benefiting from that
order to achieve the full and effective process innovation or efficiency efficiency improvement for its lifetime.
delivery of benefits to energy consumers.” improvement achieved by “We would encourage Ofgem to
In a lengthy response, IGEM recognise these mutual benefits and
identified the following issues: RIIO-GD1, the net benefit to to support strong incentives that drive
The RIIO-2 package will result in a the consumer exceeds the net efficiency and innovation as they
significant reduction to networks’ benefit to the network before will continue to improve customer
cost allowances and other revenues the end of RIIO-GD2 outcomes. As it stands there is a risk
with the potential to significantly that the regulatory structure proposed
reduce their ability to fund core in the methodology will not deliver
regulatory obligations. He continued: “We would encourage this; rather the proposed structure
The proposals look to limit and lower Ofgem to recognise that there are risks stifling ambition by focusing on
network returns in the short term. different priorities for electricity and gas penalties rather than incentivising
IGEM believes this move will stifle networks. Whilst we acknowledge that better consumer outcomes.”
the innovation needed to facilitate the utilities companies serving electricity and
required continued transformation of gas consumers are covered by separate Read the response in full by
the energy sector. legislation, this does not allow for a visiting www.igem.org.uk

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