Citizens Advice response to Ofgem Open Letter Consultation on approach to setting the next electricity distribution price control (RIIO-ED2)
The RIIO-ED2 (ED2) price control process offers the opportunity to ensure that Great Britain’s electricity Distribution Network Operators (DNOs) act in the best interests of consumers in an increasingly changing energy environment. As well as operating an effective and reliable electricity distribution service, DNOs will also need to play an integral part in enabling the transition to a net zero carbon emission world.
Ensuring a reliable and safe network will be a priority, however, it is essential that consumers are paying fairly for the costs of the distribution network, including being protected from the higher risks from the continuing development in the energy system. These changes, such as the development of Distribution System Operation (DSO) functions, the growth in flexibility providers and other distributed energy resources, and the technological changes in actively managing the networks, while less certain than previous practices, offer opportunities to provide a cheaper and more environmentally favourable electricity distribution system.
We remain supportive of Ofgem’s intentions to enable investors in DNOs to receive a fair return on their investment whilst delivering an excellent quality service to consumers. One of the biggest challenges for Ofgem is to achieve this whilst ensuring DNO companies are working to a clear and realistic net zero roadmap (both internally, and in a wider sectoral facilitation role). As we mentioned within our response to the RIIO-2 Sector Specific Methodology consultation, we welcome Ofgem’s focus on reducing the cost of capital for RIIO-2 and ED2. Some network companies have made voluntary returns back to consumers when there has been overcharging during RIIO-1. Western Power Distribution is an example of one of the electricity distribution companies undertaking a voluntary return. Although these companies have not returned all of the money identified through our analysis, the returns made so far are the right thing to do. There are still a number of companies who have taken no action. We think that Ofgem’s proposals should include a consideration of a company’s approach to voluntary returns, and specifically any voluntary returns made in the RIIO-1 period, when determining the settlement that the DNOs are given. Ofgem should be able to have more confidence in those companies that have taken action and returned money to consumers. Ofwat is taking this approach in PR19 in assessing water companies who have made voluntary returns.
The current development of DSO functions by DNOs, including the overarching framework through the Energy Networks Association (ENA) Open Networks project, should lead to the establishment of a lower cost, and more responsive network while also facilitating the move to a low carbon emission environment. At present, the DNOs are in a primary position to start to develop these DSO functions. However, we recognise that the need for market neutrality, transparency, and the opportunity for other parties to be able to compete to drive down costs. As such, there may be a different final outcome for the DSO functions which may be spread across a range of parties, including non-DNO entities. As such, the ED2 price control will need to be flexible and designed to enable future delivery changes for DSO functions while enabling continued and speedy development.
The transition to a low carbon future with a more locally distributed and responsive electricity network should lead to lower bills for all consumers, however, there is a risk that some consumers, that may be less affluent or have other vulnerabilities, may not benefit as much as other consumers. The development of DSO functions will need a continuing focus on ensuring that the network changes are inclusive for all consumers. The DNOs are considering this issue via the ENA Open Networks project, and will need to ensure that the changes to the electricity distribution network are designed in an inclusive and low cost manner.