New Price Review Regime to Encourage Investment by UK Energy Networks

UK energy regulator Ofgem has announced how the new performance-based RIIO framework will encourage the efficient investment and innovation required for Britain’s gas and electricity transmission and gas distribution networks. The price controls for these networks will run for eight years from 2013-2021.

RIIO (Revenue=Incentives+Innovation+Outputs) is designed to incentivise companies to meet the unprecedented challenges they will face during the next decade: to find over £30 billion of investment needed to meet environmental targets and secure energy supplies, while delivering long-term value for money for consumers. This would double the rate of investment from the previous 20 years.

Ofgem believes that a ‘carrot and stick’ approach of strong incentives and penalties stimulate greater efficiency from the companies. Successful companies that deliver will be rewarded. Any that do not will be penalised.

According to Ofgem, the new RIIO price model should save consumers £1 billion over the next eight years.

The package will include funding to encourage innovative investment solutions at low costs for consumers. To encourage greater innovation, Ofgem will set up a £400 million fund for the transmission and gas distribution companies. This is based on the successful Low Carbon Networks Fund already in place for electricity distribution networks.

“Britain’s energy networks have a huge role to play in delivering over £30 billion of the £200 billion of energy investment needed in the next ten years. This is why it is important that Ofgem sets companies a clear incentive framework to deliver the necessary investment and innovation as cost effectively as possible for consumers,” comments Alistair Buchanan, chief executive of Ofgem. “It is now up to companies to rise to the challenge. They must set out by the end of July how they are going to ensure safe, reliable networks with high levels of customer service while delivering the investment necessary to meet the needs of a low carbon economy.”

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