UK energy regulator Ofgem yesterday announced proposals to change its price control regime to encourage more investment in the power grid.
Investment of around £32 billion is needed in the distribution grid over the next 10 years, estimates Ofgem, in order for the UK to meet its low-carbon commitments and bring online a new generation of renewable energy sources.
To drive that investment, Ofgem is proposing a new pricing model, Revenue = Incentives + Innovation + Outputs (RIIO), which would reward the best performing companies that innovate and invest without price spikes for customers while providing good service and penalise those that fail to reach the mark.
The best performers would receive fast-track price controls, giving higher returns, while the worst would see more intrusive regulation and lower returns.
To avoid short-term under-investment and keep price rises for customers as low as possible, Ofgem is proposing increasing the price control period for energy networks from five years to eight years.
Ofgem would also like to see network customers giving more feedback to network operators about their needs, for example quick connection for renewable developers.
New network companies would also receive a warmer welcome, with support on the delivery of large-scale projects.
“If Britain’s energy networks are going to meet the challenge of delivering a low-carbon economy then we need them to have innovation in their DNA,” said Ofgem chief executive Alistair Buchanan in a statement. “To bring about this change Ofgem is seeking to make regulation ‘smarter’ by placing more emphasis on financial incentives to deliver efficient innovation and investment over a longer timescale.”
Ofgem admits that prices are certainly going to rise for customers. If the total £200 billion investment in all aspects of the UK’s energy generation and distribution sector is made that Ofgem estimates is necessary to meet its emissions commitments, energy bill are likely to rise by 14-25% over the next decade.
The proposals will now be subject to a final round of consultation until final proposals are published in September. The new regime will only be implemented gradually as new price controls start for gas distribution and gas and electricity transmission come in 2013 and 2015.
For further information:
UK Energy Secretary to address parliament on energy policy (27-Jul)
UK sets sails for new era in marine projects (26-Jul)
UK Government promises certainty for energy industry (15-Jul)
UK energy regulator announces first tranche of £1 billion grid investment (20-Jan)
UK energy regulator to allow electricity price rises to support grid updates (7-Dec 2009)
Ofgem report indicates urgent need for improved efficiency (12-Oct 2009)
27 July 2010