Ofgem proposes new price controls, more research funding to meet U.K. smart network challenge


Alistair Buchanan,
Chief Executive,
London, U.K. — (METERING.COM) — July 26, 2010 – U.K. energy regulator Ofgem has proposed a range of measures, including new long term price controls and substantially expanding the Low Carbon Networks Fund to stimulate smart grids to meet the challenge of moving to the smarter network of the future.

In an earlier study Ofgem estimated that investment of £32 billion is required in Britain’s energy networks over the next ten years in order to move the country to a low carbon economy at the lowest price possible for consumers.

A key feature of the proposals is a new price control model, named RIIO (Revenue = Incentives + Innovation + Outputs), which places more emphasis on incentives to drive the innovation needed to deliver the required outputs in terms of improved customer service and smarter grids.

As part of this, the price control period should be extended from the current five years up to eight years in order to give long-term certainty to investors while keeping the investment costs for consumers as low as possible.

Other key features include a fairer and transparent approach to financeability, which will provide more clarity and predictability for companies and investors, much greater say for network customers in setting out what network companies need to deliver, i.e. renewable developers might want faster connections, and more intrusive regulation for poorly performing companies that will face lower returns.

It is also proposed to add the option of giving new network companies a greater role in delivering certain large scale projects where this does not delay delivery, which could open up new sources of finance and encourage innovation, and expanding the current low carbon networks fund to encourage and reward greater innovation across gas and electricity networks. Two packages are proposed, one for electricity and one for gas, and it is proposed that they go live from 1 April 2013. All types of innovation should be funded, from R&D, to trialling, to demonstration projects.

“If Britain’s energy networks are going to meet the challenge of delivering a low carbon economy then we need them to have innovation in their DNA,” commented Ofgem’s chief executive, Alistair Buchanan. “To bring about this change Ofgem is seeking to make regulation “smarter” by placing more emphasis on financial incentives to deliver efficient innovation and investment over a longer timescale.”

Ofgem has estimated that energy bills could rise between 14 and 25 percent by 2020 to deliver the total £200 billion investment (including the £32 billion network investment) that is required in the energy sector over the next 10 years.