It’s price control time, so how do energy distribution network plans stack up?
We read the business plans so you don’t have to. Here’s what you need to know
The 6 electricity distribution companies are known as Distribution Network Operators (DNOs). They take the high voltage electricity off the big grid pylons and deliver it to homes and businesses across Great Britain. These monopoly companies are part-way through a price control process called ED2. This is where the regulator agrees the services that the companies provide for 2023–28 and the money that they’ll get. About 16% of people’s energy bills are made up of a payment for the distribution of electricity, so there’s billions worth of consumers’ money at stake.
DNOs have sent their draft plans to the regulator, Ofgem, so that it can get an early look at ideas. The companies will be revising them until 1 December 2021, when the final business plans are sent to Ofgem for review. Decisions are then made under the price control process to approve or reject the plans, or parts of them. There is still time to give feedback to the companies to improve the plans. We’ve published our views on them in a longer report, but we’re sharing a few key points in this blog.
The positive
At this stage in the process, the DNOs are required to send their draft business plans only to the regulator, Ofgem. But 5 of the 6 DNOs have published them on their websites and one published a shorter summary document. Most companies also published strategies and annexes that support the plans. Companies have asked for feedback from people about their aims. This is a good move to make sure that stakeholders can shape the plans before they’re finalised by December 2021.
It’s clear that every company has taken on board the need to plan to meet the demands of Net Zero. This is especially important in the coming years when there’s an expected uptake of Electric Vehicles (EVs) and heat pumps. There are lots of good ideas on how to meet new demand including using the existing network better. Distribution System Operation (DSO), as it’s known, will mean working with many third parties to turn up generation or turn down demand. It’s important these third parties feel that the DNOs are running their DSO activities transparently. DNOs have proposed different ways to improve that transparency and to gain stakeholder views. Ideas include using stakeholder satisfaction surveys or independent DSO panels. One company suggested having an independent and separable DSO. This goes much further than any current Ofgem requirements. There might be benefits to having more independent DSOs. Ofgem is planning to carry out a review of DSO governance to look at the advantages and disadvantages of independent DSOs. There’ll be costs to separate out DSOs from the DNOs but it might be worth it.
The negative
DNOs reported that this coming price control period holds many uncertainties. Net Zero policy changes at UK government level, devolved government level or by local authorities could speed up what the DNOs need to do. Consumer willingness to take up low carbon technologies like EVs or heat pumps might be slower or faster than expected. People might switch to Time of Use tariffs that might reduce peak demand, and so reduce the need to invest in a DNO’s capacity.
Forecasting for the DNOs is getting harder than ever. While uncertainties might be bad, there are solutions. One way is to get the forecasting as accurate as possible. Then the regulator can allow as much funding as looks certain in the ‘business as usual’ baseline allowances. A second solution is to use an automatic release of money under an uncertainty mechanism. This provides more money when certain triggers are reached, such as a squeeze on capacity in an area. Getting these 2 types of funding balanced is tricky for the regulator. Ofgem will need to allow for money when it’s required but not overpay DNOs to build equipment which is under- or never used.
Ofgem will have to consider the accuracy of the forecasting to decide how much to release in routine baseline funding. The uncertainty mechanisms must have accurate costs or companies could be overpaid. The mechanisms will also need to deploy rapidly to meet changes in policy or consumer behaviour.
The challenging
The electricity distribution price control kicked off in 2019 with an opening consultation by Ofgem. There are many more stages along the way until we get to final decisions by Ofgem at the end of 2022. Even then, the process might continue into 2023 and beyond if there are appeals against the Ofgem determinations. This whole process takes a long time and produces a lot of work for companies, Ofgem and stakeholders. For instance, the draft business plans were each 200 pages long. One company alone put out 44 extra documents of strategies and details. This takes a lot of people to produce. It’s also costly for the regulator and any stakeholders trying to go through the volumes of material. We are pretty much the only independent body that goes through these plans in detail. While it’s our job as the consumer voice for energy, it’s still a big undertaking.
There does seem to be a feeling that each price control is more complex than the last. This isn’t ideal for the industry or consumers. Each stage of work is funded by bill-payers or tax-payers. Smaller stakeholders might feel excluded from taking part due to the large amount of paperwork to read and comment upon.
There might be ways to streamline the price control process to make it easier. In the coming year, we’ll be looking at what has worked well and what we can learn from other industries or countries. We’ll feedback our research ideas with the aim for future price controls to be effective but with greater agility.
