Report critical of network companies’ lack of proactivity ahead of net zero

Ofgem’s RIIO-2 Challenge Group has expressed disappointment that the majority of network companies have failed to be “genuinely proactive” in shaping the path to net zero.

On 24 January, the group published its report for Ofgem in which it assessed the business plans of the energy network companies for RIIO-2. As well as stating that only the ESO had shown proactivity when it comes to shaping the path to net zero, the report made several other key points, including that the companies asking for an additional £4bn of expenditure for RIIO-2 could not be justified. Representing a 20% increase to RIIO-1, the report said that the expenditure was based, to a large extent, on business as usual rather than the transition to net zero and they believed there was still scope for significant improvements in efficiency.

Elsewhere, the group concluded that no company had managed to persuade them that Ofgem’s working assumptions for the Cost of Capital had made their businesses unfinanceable, while also recommending an “urgent review” of the Health and Safety Executive (HSE) mandated Repex programme. The programme is a significant area of gas distribution network companies – accounting for over £3bn during RIIO-2 – and has not been reviewed by HSE and Ofgem since 2010.

With regards to output proposals in the areas of environment and, for the gas distribution companies, consumers in vulnerable circumstances, the report said that while some companies had demonstrated “much needed ambition”, costs were significant, and justification was often unclear. The group added that it was not convinced that the companies’ Consumer Value Propositions demonstrated significant additional value for consumers overall, though noted a few individual proposals could have merit.

On the ESO, the group said it is set to play a critical role in this new world, but the extent of this role remains unclear, as do the responsibilities of the ESO and Transmission Operators. Furthermore, despite encouraging ambition from the ESO, the group said that they do not believe it has been proactive enough when it comes to ensuring the key issues for the energy transition are addressed and the benefits from whole system planning are realised. Questions were also raised on its ability to deliver its IT change programme, consider larger and more challenging than what it has done in the past.