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Citizens Advice RIIO-2 Framework consultation response

We respond to Ofgem’s consultation 330 KB on the framework to set the next round of price controls for energy network companies which will run from 2021. This response is entirely non-confidential and can be published by Ofgem.

We are supportive of the RIIO framework and believe that this approach to monopoly regulation has been a great improvement on previous price controls. We have been critical of particular elements of the current RIIO-1 price control framework, particularly with regards to the level of returns which network companies have achieved and which we have highlighted in previous research (Citizens Advice (2017), ‘Energy consumers’ missing billions’;  Citizens Advice (2018), ‘The postcode lottery in energy profits- a regional update of energy consumers’ missing billions’). However, our view is that the model requires optimisation and not a restructure. There are a wide range of challenges ahead for the energy sector if we are to move to a more flexible and decarbonised energy system, and we are keen to see RIIO2 play a central role in delivering the benefits of the transition to consumers. We are pleased with Ofgem’s proposals which put RIIO2 on the right tracks, however now it is vital that Ofgem sticks to its intentions and delivers.

In our response we have detailed those areas where we believe the framework requires further refinement, additional evidence  or where proposals would not be best placed to meet the needs of consumers or the movement towards future energy systems. We look forward to working with Ofgem to develop these.

In addition, as part of our response we have developed five principles that we think need to be met in order for the next price control to really deliver for consumers. Whilst we consider these principles to be rightly demanding in order to produce the best outputs for consumers, we do consider these tests to be achievable. In summary, these include:

  1. Profits are lower than the previous price control, to more accurately reflect the relative low risk for investors in this sector. The energy regulator Ofgem has allowed energy network companies to earn excessive profits, costing consumers billions of pounds. These companies are attractive to investors because of the low risk nature of essential service monopolies. Future profit levels should be set at a level that more accurately reflects that low level of risk.

  2. The value of any unspent funding for infrastructure projects is returned to consumers promptly and in full. Through their bills, consumers are paying for significant infrastructure investment. However, if energy network companies defer these projects or decide not to undertake them, they are sometimes able to keep a portion of that funding. This can drive up costs for consumers.

  3. Industry business plans and regulatory decisions are directly informed by consumer (including future consumer) feedback and research. Because energy is an essential service it’s crucial that consumers’ views are properly reflected in the networks that they pay for.

  4. Companies are required to publish complete information on their performance, financial structures, gearing and ownership. Increasing transparency in a monopoly essential service will help to ensure that consumers are getting value for money. At present, Regulatory Accounts don’t provide a complete picture of how firms are operating under the RIIO framework. These should change to include the impact of different capital structures, financial outperformance, derivative portfolios and how returns differ from the regulator’s assumptions.

  5. Innovation funding and incentives support consumers in the transition to a low-carbon future, particularly those consumers in vulnerable circumstances. Future demands on the energy system are hard to predict. For example, smart homes, electric vehicles and the need for increased energy efficiency will put different demands on energy networks. It’s important that the needs of consumers - particularly those in vulnerable circumstances - are reflected when decisions about the future of the energy networks are made.