Reopening electricity networks price control could cost more than it saves, says Ofgem

Ofgem has decided not to carry out a mid period review (MPR) of electricity network companies’ price controls. The decision means that local networks will continue under the current settlement, which governs the revenue they can collect from consumers and sets the outputs required, until 2022/23

The regulator has come under pressure over the level of profit made by distribution network operators (DNOs), which have all been winning incentive payments that were meant to reward only exceptional performance. It raised the possibility of carrying out an extended MPR that reconsidered the incentives regime.

Now Ofgem says that although it recognises that “an extended MPR focused on addressing financial and incentive performance and design could secure benefits from consumers”, those benefits were outweighed by the likely loss of investor confidence.

An impact assessment found that resetting incentive targets and reducing underspend could deliver consumer benefits of up to £682 million between 2019/20 and 2022/23. But that could be “completely offset” by an increase in the cost of equity of 0.5% or in the cost of capital of 0.2% and such increases were “not unlikely”, said the regulator. It said the cost across all networks could be £300 million to £3.1 billion in the period.  

Ofgem added, “A stable regulatory framework will allow us to maximise savings for consumers at the next round of controls under RIIO-2. Deviating from the clearly signalled scope of the MPR could undermine this stability, weaken confidence and increase costs for consumers”.

The regulator also decided against carrying out a limited MPR that would look at specific issues such as the introduction of electric vehicles, flood resilience, black start and the smart meter rollout. It decided the issues were either out of scope of the MPR as defined, or very uncertain at this stage and better dealt with as part of the review for the next regulatory period.

In one instance – rail electrification – it agreed that WPD wold return £77 million to customers, because the money was to be used to divert network assets for rail electrification that would not now take place.

Energy Networks Association chief executive David Smith said: “Today’s announcement is good news for consumers because it means they will continue to benefit from network companies delivering investment as cheaply as possible, without distraction. It will keep the cost of new infrastructure down through maintaining investor confidence.”