Ofgem confirms approach to boosting green and smart investment in local grids
Ofgem has confirmed its methodology for setting the next price controls for Great Britain’s local electricity distribution networks, known as RIIO-ED2, which run for five years from April 2023. This follows last week’s confirmation of the major investment programmes for the transmission, gas distribution and Electricity System Operator (ESO) price controls starting in April next year.
- Investment in local grids unlocked to support up to 11 million electric vehicles by 2030 and increased demand for heat pumps.
- Increased digitalisation and companies’ data use to drive smarter and more flexible energy such as through battery storage technology.
- Fairer balance between shareholders and consumers, delivering investment to support an emissions-free Britain while keeping costs as low as possible.
Electricity distribution networks (DNOs), which transport electricity locally to Britain’s homes and businesses, have a crucial role in eliminating harmful carbon emissions from the energy sector in line with Government targets for the UK, Scotland and Wales. (1) As Britain moves to greener forms of heating and transport and more households and businesses produce their own local clean energy (2), local networks will have to expand their role and capacity to manage new sources of demand and an increase in electricity flowing through the grid. (3)
Ofgem has confirmed that its proposed 2023 price control for electricity distribution networks will:
- Support strategic investment to deliver net zero emissions targets ensuring companies can increase capacity to support growing demand, for example providing more charge points ahead of an anticipated uptick in electric vehicle use, with appropriate protections in place for consumers.
- Require DNOs to grow their capacity using ‘flexible’ solutions where they can, such as battery storage or smoothing peaks in demand, before building expensive new network capacity.
- Increase digitalisation of the energy system, requiring electricity network companies to better share and coordinate data on local energy use – including sharing this with flexibility providers.
- Ensure the companies support an accelerating and increasingly decentralised energy market, requiring new Distribution System Operation (DSO) responsibilities, with enhanced capabilities in planning, operation, and market services.
- Retain a strong innovation stimulus through direct funding and access to the new £450 million Strategic Innovation Fund, with more if needed, to drive the decarbonisation of power, heat and transport at a lower cost than current technology allows.
- Maintain the current high levels of reliability and customer satisfaction while making sure that the most vulnerable consumers get additional support when they need it.
- Ensure less of consumers’ money goes towards network companies’ profits, and more towards investing in network capacity to fight climate change. (4)
Ofgem’s Chief Executive Jonathan Brearley said:
“Local electricity networks will be at the forefront of meeting the climate change ambitions laid out recently by the Governments in the UK, Scotland and Wales. They will need to, make sure the right arrangements are in place to support the capacity and charging infrastructure that will drive the electric vehicle revolution and the solutions needed to provide cleaner energy for heating our homes.
“This will require a more modern, smarter, digitally enabled grid that evolves in line with rapidly changing demands and maximises the benefits from all available energy assets.
“Our approach to our price control for electricity distribution will encourage the investment needed to deliver these ambitions while maintaining world class levels of reliability and keeping costs as low as possible for consumers.”
Ofgem has also been exploring measures to bring forward energy network projects that drive green recovery and decarbonisation, for example increasing grid capacity to support new connections or upgrading grids to support green energy. Around £80 million of shovel-ready projects have been accelerated to start in 2020, increasing capacity to support new connections - including a new vaccine centre - as well as preparing the grids for net zero and the predicted growth in electric vehicles.
Work is ongoing with the networks to develop further opportunities to stimulate low risk, low carbon strategic investment to support net zero and future users’ needs in line with Government priorities. Further information on these options is expected early in 2021.
Notes to Editors
- Ofgem’s five-year RIIO-2 price controls will set the framework and the revenue that each of GB’s 14 Distribution Network Operators (DNOs) can earn from charges on consumers’ energy bills. The average GB customer currently pays around £90 per year to meet the costs of operating, maintaining and reinforcing these local grids.
- Last year the UK Government legislated to cut the UK’s carbon emissions down to ‘net zero’ by 2050. Welsh and Scottish Governments also have made net zero commitments.
- In December 2020, the Committee on Climate Change announced the 6th Carbon Budget in which they recommended a 78% reduction in UK territorial emissions between 1990 and 2035. This followed the publication of the UK Government’s 10-point plan for a “Green Industrial Revolution”, which signalled a commitment to end the sales of new combustion engine cars and vans by 2030 and a target to roll out 600,000 heat pumps a year by 2028. In summer 2020, the National Grid Future Energy Scenarios forecast that to meet Net Zero: 11 million more EVs on GB roads by 2030; by 2035 all replacement heating systems should be low carbon or ready for hydrogen; over 8 million hybrid heat pumps are projected to be adopted, responding to market signals and shifting demand between hydrogen and electricity systems by 2050.
- Our methodology for RIIO-ED2 will ensure that consumers can benefit from high quality network services while bills are kept low. Final methodology decisions on the financial framework, including our working assumptions on the cost of capital, will be taken in Q1 2021. However, in common with our approach to the other RIIO-2 price controls we still expect to see lower returns for investors in RIIO-ED2.
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