An American View of RIIO

https://www.linkedin.com/pulse/american-view-riio-maxine-frerk/

U.S. states have looked at RIIO as a model for how to tackle the energy transition - we should build on its success.

During a recent visit to New York I caught up with some people from NYU working on New York REV – New York’s much acclaimed programme for transitioning to a low carbon energy system. I had contacted them because 4 years before they had held a round table (including Ofgem representatives) and produced a report on the lessons from RIIO and I wanted to see how New York had got on trying to incorporate some of our thinking into their programme at a time when RIIO itself is under heavy scrutiny.

The key aspect of RIIO that has been picked up by New York REV (and other US states) is around performance-based regulation – looking to align investors’ interests with those of consumers by providing financial incentives for performance improvements that matter to consumers. This was a key plank of RIIO (with Incentives for Outcomes being in the title) but risks being lost in the current focus on the level of returns.

New York had identified 5 areas where companies could earn additional rewards (Earning Adjustment Mechanisms- EAMs) covering system efficiency (peak demand and load factors), energy efficiency, timeliness of connections, customer engagement and greenhouse gas reduction. These have now been incorporated into the rate cases brought forward by a number of utilities – with the exception of greenhouse gas reduction which though important has proved intractable to measure with sufficient robustness to attach a financial incentive to. But attempts are being made to measure this as the first step – a lesson for GB perhaps as I return to below.

 Given this was their first foray into performance-based regulation it has not all been plain sailing. The scheme was designed as being upside only which has attracted some criticism and calibrating the incentives hasn’t been easy – some have been too hard to meet and as a result haven’t changed behaviour, some have been too easy and the companies have secured rewards for too little effort. Not unfamiliar issues - but the expectation is that everyone will learn from the experience.

Performance-based regulation is just one track out of 15 now spawned by New York REV – highlighting the complexity of delivering the energy transition. What started as a bold initiative to look top down at what the shape of future regulation needed to be has nonetheless found that the devil is in the detail and the problems we are grappling with here seemed all too familiar to them too. Politicians have set a target for storage while policy makers might have preferred a technology neutral regime. DER providers and community groups are frustrated at the slow progress and lack of clarity about how they will be rewarded for the support they provide the networks. They are just about to start a proceeding on network charges based around charging for coincident peak usage but with the same worries around distributional impacts and practicalities that are voiced here.

The one area where they do seem ahead and which I’ve commented on before is microgrids which can operate in islanded mode when the power is down. For example, all universities are microgrids and a number of community schemes are being established on that basis. The motivation is the risk of extreme weather events like Hurricane Sandy and the generally poor levels of network reliability (with limited undergrounding of networks). However they also play an important role in supporting the system as part of the energy transition – with consequential debates about how they should be rewarded for that.

Returning to the point above about how to reflect low carbon goals into a performance-based regulatory regime, this is something that RIIO has not yet cracked but given the scale of the challenge is something that should be looked at hard for RIIO2. While there are some environmental incentives in RIIO1 they are a patchwork with no consistency across sectors and some critical gaps. Working with Sustainability First I co-authored a discussion paper and helped host a round table to try to draw attention to the need for this to be addressed in RIIO2. The full paper, which advocates an over-arching low carbon incentive, is here.

It’s striking that in Alex Chisholm’s speech to Utility Week about the ways in which GB has led international thinking around energy markets and regulation there was no reference to RIIO. The original aspirations for RIIO were absolutely ground-breaking – looking at how regulation of networks could be used to support the low carbon transition and a stronger consumer focus. We must not lose sight of these original goals and must continue to find world leading ways to drive such change – rather than retrench to something more akin to old style US rate of return regulation.

In the meantime, looking back across to the US, I note that Hawaii has now set one of the most ambitious decarbonisation targets around with a goal of 100% renewables by 2045. Their networks are facing the same challenges that we have here but in spades. They have recently announced that they are going down the path of performance-based regulation (helped I hope by the brief discussions I had with them on RIIO two years ago). The plan is that this should include target outcomes on connection of renewables and data sharing. The interesting twist they are bringing though is to try to move from the incentives being all about additional revenue on top of the rate base and to look at how to put more revenue at risk linked to performance. Anyone want to fund a study trip to Hawaii?