Ofgem consults on proposals to allow additional costs to network companies
Ofgem has today published three consultations on its draft decisions to allow additional efficient costs for National Grid gas and electricity transmission and two gas distribution network companies under pre-defined RIIO uncertainty mechanisms.
Such applications, or ‘re-openers’, are allowed under the RIIO-T1and RIIO-GD1 uncertainty mechanisms, which permit companies to seek funding for costs which were uncertain at the time of setting the price control. The applications, received in May 2015, have been sought in order to fund enhanced security to critical national infrastructure (CNI), street works, and industrial emissions costs.
The total requested adjustment to RIIO expenditure allowances is £828 million. Of this, £776m is for National Grid (transmission and distribution) and £52m for Scotia Gas Networks. Following review, Ofgem is proposing to allow £667m costs to National Grid and £39m to Scotia for the RIIO-T1 and GD1 period. In addition we are consulting on reducing the CNI costs allowed for National Grid in the previous price control period (TPCR4) by £72.5m.
Comments are sought on the draft decisions by 1 September 2015. Ofgem will publish its final decisions by 30 September 2015.
Enhanced physical security
This reopener is for upgrading the physical security at sites categorised by the Government as Critical National Infrastructure (CNI). Upgrades must be carried out in line with the Centre for Protection of National Infrastructure advice, and are required to implement the UK counter terrorism strategy. The majority of these sites are owned by National Grid.
Subject to the consultation, Ofgem is proposing to allow:
- £532.9m of the £631.8m costs claimed by National Grid gas and electricity transmission for upgrades to the relevant sites; and
- £101.8m of the £126.8m costs claimed by National Grid and Scotia, for upgrades to the sites across five gas distribution networks.
The requirement to fund physical security upgrades to CNI sites began under the previous price control TPRC4. Ofgem is also reviewing the costs incurred by National Grid under this price control, and proposes to reduce the £375.1m that was allowed by £72.5m, following an efficiency assessment.
The adjustments under both price controls will be made via network charges to suppliers. Ofgem’s goal is to ensure that the companies deliver the upgrades required by Government at the best possible value to consumers and that the impact upon bills is minimized. Where project management costs are considered high in comparison to other companies, Ofgem has proposed reductions.
National Grid has applied for an additional allowance of £41m to fund projects at compressor stations to meet the European Union’s Industrial Emissions Directive. This is in addition to funding that has already been agreed under the RIIO T1 price control.
Ofgem is of the view that National Grid has not justified the additional expenditure, and so is currently minded to refuse the application.
The RIIO GD1 price control for 2013-21 allows the gas distribution networks (GDNs) to apply for adjustments to their allowed expenditure for additional specified streetworks costs. Three of National Grid Gas plc’s (NGGD) GDNs, East of England, London and North West made an application and proposed a combined adjustment for streetworks costs of £33.3 million.
After assessing NGGD’s applications, Ofgem is minded to propose efficient costs of £22.7 million. However, the level of efficient costs proposed for East of England falls below its one per cent materiality threshold and therefore an adjustment to expenditure will not be allowed for this GDN. Ofgem propose a total adjustment of £19.5 million for London and North West.
Impact on consumer bills
Ofgem is required to enable network companies to recover the efficient costs of delivering their activities. This consultation on our assessment of efficient costs will result in an increase in household gas and electricity bills. In 2016-17 an average customer’s electricity bills will increase by 24 pence per annum due to our minded to position on National Grid Electricity’s reopener claims, against a claim for 29 pence. For gas, a customer’s bill will increase by between 20 pence and £5.52 in 2016-17, depending on the network area.
Ofgem is the independent energy regulator for Great Britain. Its priority is to make a positive difference for consumers by promoting competition in the energy markets and regulating networks.
For facts, figures and information about Ofgem’s work, see Energy facts and figures
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Kate Wilcox 020 7901 7113
Chris Lock 020 7901 7225
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