Challenge group report on company business plans for next price control

24 Jan 2020 11:01 AM

The independent RIIO-2 Challenge Group, has delivered to Ofgem its report into network companies’ final Business Plans for the next round of price controls. (1)

Ofgem sets price controls for the monopoly companies that operate Britain’s energy networks and wants consumers to have a stronger voice in the process for setting the next price controls. 

Ofgem set up the group, made up of consumer advocates - as well as technical, regulatory and commercial experts - to challenge each network company on how its spending plans take into account consumers’ needs and views. (2)

The next set of price controls is expected to result in lower network costs for consumers while enabling the companies to help decarbonise the UK economy to hit the net zero emissions target at the lowest cost to consumers. 

The group is independent of Ofgem. Its report is one of a number of considerations that will help inform Ofgem’s assessment of companies’ Business Plans. 

The group’s views include:

• No company, apart from National Grid Electricity System Operator, has been genuinely proactive in shaping the path to net zero.
• After stripping out variable network demand expenditure, companies are asking for an additional £4 billion of expenditure compared to RIIO-1 - around a 20% increase in costs – which the group finds cannot be justified.
• The group considers that every company is financeable with Ofgem’s cost of capital working assumptions, including a cost of equity of 4.8% (4.3% plus assumed outperformance of 0.5%). (3)

Ofgem will consult on Draft Determinations on the Business Plans in July before making Final Determinations in November 2020.

The price controls for gas transmission, electricity transmission, gas distribution, and electricity system operator, to which the challenge panel report refers, take effect in April 2021. The price control for electricity distribution begins in April 2023.

Ofgem is holding regional public open hearings this spring, to enable stakeholders to directly challenge companies’ Business Plans.

Ofgem is currently calling on stakeholders to respond to a call for evidence and to participate in these hearings. 

Notes

1. The Challenge Group report refers to the price controls for gas/electricity transmission (T2) and gas distribution (GD2) from 2021 to 2026. Ofgem is consulting separately on the electricity distribution price control (ED2).
2. More information on the Challenge Group - https://www.ofgem.gov.uk/publications-and-updates/ofgem-sets-independent-panel-challenge-network-company-business-plans-next-price-controls
3. Some companies take a different view of the Group’s findings, including that every company is financeable with Ofgem’s cost of capital working assumption.
4. Since 1990, network companies have invested around £100 billion in the national and local grids, operating one of the most reliable networks in Europe. Power cuts have almost halved since 2001, while customer satisfaction with local networks has improved significantly. 

For more information

Ruth Somerville, Communications Manager
Tel: 0207 901 7460 / 07990 139504
ruth.somerville@ofgem.gov.uk