PA comments on Ofgem’s draft determinations
Commenting on Ofgem’s draft determinations, PA Consulting’s energy and utilities expert, Allan Boardman, says:
RIIO becomes RIO. The ED2 determinations appear to have lost sight of the incentive part of the framework. Whilst changes to totex allowances look less dramatic than in T2 and GD2, the reworked incentive package has large downsides for dealing with historic issues such as reliability. There are also limited incentives to drive change in new areas that are needed to deliver a just net-zero transition, such as around DSO and vulnerability.
Regulation Directors will have much work to do over the summer and beyond. The draft determinations include a total of 34 uncertainty mechanisms plus an additional three bespoke mechanisms. This shows a recognition of the evolving energy landscape and provides adaptability to unexpected or accelerated changes. The question is, will the effort required to monitor and manage these mechanisms outweigh their effectiveness and benefit to the consumer?
It is not quite yet time to pull the trigger on CMA appeals. Ofgem has taken lessons from GD2/T2 and steered clear of overly provocative positions on WACC and cost allowances. With limited details provided on the incentive and uncertainty mechanism package, DNOs will have to wait until FDs before deciding whether to fire the starting gun on appeals to the CMA.
The RIIO-ED2 determinations appear benign on the surface but companies will worry about the detail that lies beneath. There is nothing in the draft determinations that would spark an immediate adverse reaction. They have lower totex adjustments than previous price controls, a ‘safe’ approach to incentives, and limited impact from the Business Plan Incentive. The battlegrounds for change before the final determinations will lie in the detail. Areas such as specific incentives and ‘uncertain uncertainty mechanisms’ will emerge over the next few weeks when the hundreds of pages are fully digested.
Distribution Network Operators have been praised for finding new ways to help customers with limited financial benefit. The introduction of Consumer Value Propositions has encouraged DNOs to find new ways to serve customers, and we have seen many innovative approaches. Ofgem has accepted the majority of the proposals but offered minimal reward to the DNOs for developing them – this is a great result for consumers, however DNOs may feel disappointed.