RIIO2: Ofgem will need to put its foot on the gas

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Last week Ofgem published its Framework Decision for RIIO2. While badged a Decision it contained very few actual decisions – most were simply decisions to consider issues further. That’s understandable for a number of reasons but Ofgem should be under no illusion about how much remains to be done and that companies need more clarity urgently to inform their planning and the enhanced engagement that Ofgem is rightly keen to see.

The only substantive decisions in the document were the move to five years which had been well trailed, the greater emphasis on customer engagement including open hearings (ditto) and the dropping of fast track for gas distribution, driven one suspects primarily by the practical realities of the timetable. Almost everything else is subject to further analysis albeit sometimes with some trimming of the options that are on the table.

This is understandable given the board level changes at Ofgem and the inter-related nature of many of the decisions. With Martin Cave due to take over as chair and three new board members (two non exec, one exec) joining after the summer, Ofgem will not have wanted to close off any doors unnecessarily. And it is hard to take some decisions in isolation. For example – although Ofgem don’t mention it – there are obviously links between the cost of capital the companies are allowed and the risk they are asked to bear which in turn is heavily dependent on the detail of incentives and questions around stranding which have not yet really been explored.

So it makes sense but leaves a huge amount for Ofgem to do between now and the end of the year when it is due to publish its consultation on the sector specific strategies, including hopefully some cross-sectoral proposals given the stress it is placing on whole system thinking.

It is vital that this December consultation provides clear direction, informed by open dialogue before then, on what Ofgem is expecting. The companies have to submit their business plans by Q4 2019 and are expected to have engaged extensively on them before that, including providing drafts to the Ofgem Customer Challenge Group. Such engagement takes time. To do it effectively the companies will need to know, for example, what the approach to outputs and incentives is – what will be determined in advance by Ofgem and what will be for the companies to propose based on dialogue with customers.

Ofgem will need to put its foot on the gas to deliver that clear direction.

And talking of gas it’s clear that Ofgem’s thinking is still dominated by the changes in the electricity system, despite the fact that the majority of the first round of RIIO2 is about gas. While there are scattered references to gas, the examples that are given around ensuring that consumers do not pay for assets that are not needed all focus on DSR and storage. Storage gets eleven mentions while hydrogen, heat pumps and district heating get none despite their potential impact. Ofgem seems to accept the line from the gas networks that there is no stranding risk in RIIO2. That may be right but the real question is how to be confident – or as confident as one can be - that investment made in RIIO2 will not ultimately be stranded (or paid for unnecessarily by customers). Ofgem do seem to accept the need to look again at asset lives in this context, despite having said originally that they would not. But again the work involved in this and the complexities should not be underestimated as highlighted by the ED1 appeal.

On a positive note it was good to see Ofgem responding to the concerns about a lack of reference to vulnerable customers and decarbonisation in its consultation document and making clear that these are important outputs for RIIO2 which will be explored further through the sector specific strategies. But again that points to more work to be done.

With such a lot still to do all stakeholders will want to see a clear plan from Ofgem, including what they expect to see when from the companies and from the Customer Engagement Groups. Ofgem is due to produce a working paper on the business planning process in August. We must hope that provides clarity on the process to be followed even if the policy detail still needs to be worked through.

As Chair of SGN’s Customer Engagement Group I have a strong interest in getting that clarity but would stress that the comments above are my personal views, not those of the Group.