London, U.K. — (METERING.COM) — March 11, 2013 – Britain’s energy regulator Ofgem has set out the outputs that the country’s 14 electricity distribution companies (DNOs) need to deliver for their consumers and the associated revenues they are allowed to collect for the eight-year ‘price control’ period from 2015 to 2023.
Significant expenditure is needed in Britain’s gas and electricity networks over the next decade to ensure safe, reliable network services and to meet environmental challenges. Therefore, according to Ofgem, it is more important than ever that the network companies can show consumers they are getting value for money and that charges are contained.
Ofgem’s decision follows a consultation and now requires the DNOs to develop their business plans taking these factors into account.
The next price control is the first based on the so-called RIIO model, in which Revenue = Incentives + Innovation + Outputs. The objective is to drive real benefits for consumers, while providing companies with strong incentives to meet the challenges of delivering a sustainable energy sector at a lower cost.
Under the RIIO model utilities will be rewarded via outputs for safety, reliability, customer satisfaction and stakeholder engagement, to incentives for efficient delivery, providing a better service for connecting customers, and identifying and assisting vulnerable customers and the fuel poor. For the average DNO, both the rewards for good performance and the total value of penalties could be up to around £300 million respectively over the price control period.
The DNOs will also need to set out how they plan to accommodate uncertain levels of low carbon technologies onto their networks, with outputs and incentives to ensure they do this at efficient cost using smart grids tools and techniques. They will also be incentivized to manage their carbon footprint.
Innovation will also play a key part, and learning from the current Low Carbon Network (LCN) Fund is expected to be embedded in the DNOs’ business plans. In turn for the price control period, the Fund will be replaced with a competition to fund innovation across electricity transmission and distribution, with up to £180 million available across the first two years.
Regarding the business side Ofgem says it is committed to ensuring that efficient companies are able to raise timely finance and are remunerated appropriately, and that there is a fair balance of costs between current and future consumers. As part of this it has been decided to index the cost of debt assumption based on a long-term trailing average of interest rates and to move to the use of economic asset lives for depreciation, which for electricity distribution is determined to be 45 years (from 20 years currently). Further, an indicative cost of equity range has been set out of 6.0-7.2 percent (post-tax real) based on the expected future risk profile of the DNOs. When the DNOs have set out their business plans, an appropriate range for the allowed return for the price control settlement will be established.
The DNOs are now required to submit their business plans by July 1, with initial assessment due by the end of September.