Ofgem calls for preparation for low-carbon economy

The energy regulator says that this is nearly double the amount of expenditure seen over the last 20 years. It estimated that a total of £200bn should be spent over the next 10 years to secure electricity supplies for customers.

New sources of generation, such as large-scale wind, gas or nuclear plants or small-scale renewables and home-based microgeneration, means there will be greater requirements for network investment.

Ofgem says that the scale of investment required will mean higher energy bills are almost certain for consumers. Therefore, network companies will have to show customers that they are getting value for money over the longer term, setting out clearly what is being delivered and at what cost.

The energy regulator has unveiled a new price-control model, dubbed RIIO (Revenue = Incentives + Innovation + Outputs). According to Ofgem, the model is designed to encouraging finance in new infrastructure and rewards electricity and gas transmission and distribution network companies that invest in innovation and efficiency.

Network companies will have their performance measured against how well they deliver customer satisfaction, service reliability and safety. This would include standards to measure the frequency of power cuts and how quickly supplies were restored.

The model sets longer eight-year price controls, offering incentives focused on delivering results and expanding the £500m Low Carbon Network Fund to encourage the growth of smart grids.

Ofgem estimates that the RIIO model could cut the cost of investment to consumers by £1bn, compared with the previous regulatory framework, in the next 10 years.

Alistair Buchanan, chief executive of Ofgem, said: ‘£32bn of the £200bn investment challenge Ofgem has identified falls to the regulated energy networks and is within our statutory remit. That is why Ofgem’s new performance regulation model, RIIO, will ensure we attract this investment, but at a fair price for consumers.

‘The RIIO model will ensure that efficiency and innovation are hard-wired into the network companies. This means the benefits of the green economy, such as more skilled jobs delivering smarter networks to allow householders to run solar energy and other types of microgeneration, will be delivered. However, there will be no gold plating of the networks at customers’ expense.’

He added: ‘RIIO also gives consumers and network users a bigger voice in what they want network companies to deliver and then rewards companies that take the initiative and deliver this efficiently, while financially penalising laggards and subjecting them to closer regulatory scrutiny.’

Renewable energy trade and professional body Renewable UK stated that the proposed vital spending on upgrading the National Grid is a ‘once-in-a-generation opportunity to build a 21st century transmission network, which could accommodate the increasing input from geographically diverse low-carbon sources.

Commenting on the press statement from Ofgem, Renewable UK emphasised that the proposed £32bn for integrating energy technologies such as wind, nuclear and micro-generation will not only strengthen UK’s energy independence but, in the long term, bring greater savings to consumers, compared with continuing with inefficient and polluting fossil fuels.

The industry has highlighted that the proposed grid improvements will utilise smart grid innovations, which will make supply from low-carbon technologies more responsive to customer demand, promising further cost savings. A substantial portion of the £32bn investment is also earmarked to significantly upgrade the UK’s gas-transmission network.  

Dr Gordon Edge, Renewable UK’s director of policy, said: ‘Our electricity grid is over 100 years old and out of date, having grown to accommodate centralised thermal power generation. However, both the geographical spread and the nature of the technologies is changing. We will have a greater input from renewable sources effectively managed by the latest technologies available, such as the smart grid.

‘We have a once-in-a-generation opportunity to build a fit-for-purpose and efficient transmission network, reflecting the emerging low-carbon energy mix, which will serve the UK consumers well into the 21st century. This network will both bring cost savings in the long term and ensure our energy independence.’

According to Renewable UK, over the next decade, around a quarter of UK’s out of date coal and nuclear generating capacity is set to be retired. By 2020, the government expects a contribution of around 30 per cent of all UK electricity from renewables − up from around just under 10 per cent currently.

Edge continued: ‘The energy mix is changing. Currently we have around 75 per cent of our electricity supplied from fossil fuels. However, beyond 2020 we will be moving towards an 80 per cent decarbonised electricity supply, which can only be good for the country as a whole. Upgrading the grid is key to achieving this.’

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