Ofgem presents stricter RIIO-2, but what will the finished product actually look like?

Months after warnings from Ofgem to networks that the days of vast profit margins are coming to an end, the regulator has published proposals for what the future network incentives might look like. The answer: significantly harsher and more barren for the network tycoons like Hong Kong billionaire Ka-shing Li, who has a 20% stake in UK Power Networks.

One thing you can be sure is there will be a concerted lobbying effort by the network operators and associated companies to dilute the proposals. To pile pressure on Ofgem to hold firm, Gillian Guy, Chief Executive of Citizen’s Advice has argued that proposals will be an “acid test” of Ofgem’s ability to properly regulate the market.

So, whose voice will prevail in the debate that is set to continue? Most likely that of consumers, given the pressure Ofgem is under to protect consumers from high prices. In his opening remarks of the proposals Ofgem Chief Executive Dermot Nolan struck a robust tone saying “we have learnt some valuable lessons. Returns across these companies (network operators) have been higher than expected and do not reflect the low level of risk these companies face,” and, “this will be a tougher price control for network companies. We will set targets that reward those that deliver great customer service at lower cost, and penalise those that do now.”

One of the core proposals set out is to give “consumers a stronger voice.” To do this Ofgem proposes setting up a series of consumer led groups and open hearings in which consumers will be part of the critiquing process of network company plans. The introduction of consumers to the process are likely to dilute the voice of networks and result in a more critical analysis of network company plans, particularly if organisations such as Citizen’s Advice are in the room, able to throw significant weight and expertise behind critiques.

For non-network operators, the proposals set out a positive avenue with the aim of creating a range of new models for competition to encourage greater innovation. This includes funding opportunities for third party inventors and entrepreneurs that have ideas or solutions to solve network issues. Ofgem believes “these earlier models have the potential to better facilitate whole system solutions.”

The proposals highlight the success of the Network Innovation Competition and the Network Innovation Allowances that are open to a whole host organisations and technologies that support companies and programmes able to bring us closer to the flexible system that Government is determined to achieve.

Stakeholders have until 2nd May  to respond to the proposals. Ofgem will finalise the framework for setting the next price controls in summer 2018 and network companies will need to submit business plans to Ofgem by autumn 2019. Ofgem’s final view on price control allowances will then be published by the end of 2020.

We will have to wait until then however, to see whether it is business or the consumer that comes first for Ofgem in RIIO-2.