Ofgem Draft Determinations proposals for DNO allowances: A tipping point for network resilience

In December 2021 the Distribution Network Operators (DNOs) submitted their Business Plans to Ofgem setting out proposed expenditure for RIIO-ED2. Ofgem have now assessed these plans, and others published alongside it and set out their Draft Determinations proposals for DNO allowances under the RIIO-ED2 price control for consultation. Although many positive changes have been laid out in Ofgem’s Draft Determination, they have introduced a proposal for a significant change during the upcoming funding period.

Under the current scheme, DNOs are motivated by the hugely successful Interruption Incentive scheme (IIS which has incentivised the reduction of customer interruptions (CIs) and Customer Minutes Lost (CMLs)). Ofgem have proposed reducing the cap for IIS revenue from 2.5% of regulated revenue to 1% as well as adjusting the collar, or the penalty against underperformance at 2.5% of regulated revenue. This would be a significant degradation of what has been an important and effective scheme.

The graphs above show the significant reduction in customer interruptions and customer minutes lost in the current funding period resulting in a much-improved service for customers.

Ofgem have also published a reform to the Quality of Supply funding (QoS), that any QoS capital funding linked to maintenance or improvement of current performance levels should be disallowed going forward into RIIO-ED2.

What implications will these changes have?

The GB energy industry is already facing an unprecedented amount of pressure in the drive to achieving the ambitious net-zero targets set by the government. With an aging electricity infrastructure, significant investment will be required to ensure the networks have the capacity to support increasing demand due to the electrification of heat and transport, all while ensuring a high quality of service for consumers with as little impact on energy bills as possible.

At a time when energy consumer reliance on the network is increasing, DNOs are being asked to deliver more reliable networks, reduce operational costs, and enable more connections to the networks. The technologies to help to achieve high standards of quality of supply are proven, effective and value for money. Our own Kelvatek technology for managing fault in low voltage underground cables has been used by network operators to avoid over 2.3million hours of customers with no power during ED1. There has been widespread inclusion of capital investment in this area in their proposed plans by the DNOs after consultation with stakeholders and customers.

This change is also happening at a time of increased meteorological risk to the energy network in the form of extreme weather such as flooding, heat waves, and storms. Storm Arwen demonstrated that the network is in urgent need of increased investment to guarantee quality of supply to consumers.

The Government and Ofgem have also just published the Electricity Networks Strategic Framework that sets the strategic goal that the network of the future will be increasingly reliable and resilient to extreme weather events. This strategic goal does not tally with the blanket disallowance by Ofgem in those draft plans of any proposed capital expenditure in the area of quality of supply and the significant degrading of the IIS scheme that has served the customer so well in ED1 in terms of improved network performance.

Reform not radical change

Ofgem’s draft feedback has made the case that there is a need for reform, especially regarding the IIS due to the cost of the scheme during ED1, but we believe that this reform should be considered, evidenced, and taken in full consultancy with all impacted parties, including customers. We are not aware of any evidence from consumers that would support this position, and quite the contrary view has been captured through DNO stakeholder engagement activities. The impact of reduced QoS on all customers, including the most vulnerable, could in our view be significant at a time when our net zero targets require us to make significant progress in the electrification of heat and transport.

In response, we have written formally to Ofgem objecting to the changes and to support the spending plans of our DNO customers.