“Ofgem has adopted a new regulatory framework for the current price control period for gas distribution and transmission networks, known as the RIIO model. A key element of the RIIO approach is that it gives greater focus to incentives and innovation than the previous regulatory regime. This means new technologies and innovation play a more pivotal role in the efficient operation of the infrastructure network and in achieving operational cost savings. Under the new framework, companies are also required to take a more long-term approach to infrastructure investment decisions, with an increased focus on active asset management over traditional network investment.”
– Claudia Preedy, Industrial Analyst
This report answers the following key questions:
- What are the key drivers for replacement expenditure by gas distribution network operators?
- What are the key effects of Ofgem’s new regulatory framework, the RIIO model, on the distribution network operators’ approach to infrastructure management and investment?
- Have Ofgem’s settlements for RIIO-GD1 been too generous?
- What are the key findings to date by the ongoing CMA inquiry into the energy market?
During 2013/14, the first year of the eight-year RIIO-GD1 control period, all gas distribution networks operators came in below the regulator’s cost allowances and outperformed their targets. This resulted in Ofgem being criticised by the Energy and Climate Change Select Committee (ECCC) for being too generous in its cost allowances, while performance targets were also deemed too low. The ECCC has called for market conditions to be improved in the short term by conducting interim independent audits of price controls and increasing the notification period network companies must allow for price changes to 15 months.
This is likely to increase pressure on gas distribution network operators to reduce charges, particularly with high household energy bills remaining a political hot potato and network costs making up almost a quarter of dual fuel bills.
The terms of reference for this report concern the UK gas distribution and supply sector, comprising the downstream activities of supply to the industrial, commercial and domestic sectors.
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