RIIO-ED1 – Introductory Workshop

28 March 2012

Central Hall, Westminster

2

Agenda

9:30-10:00 Coffee and registration

10:00-10:15 Welcome and introduction to RIIO

- Hannah Nixon (Ofgem)

10:15-10:30 Overview of RIIO-ED1– Anna Rossington (Ofgem)

10:30-10:40 Q&A

10:40-10:55 Company View

- Stephen Stewart (SP Energy Networks)

10:55-11:10 Smart Grids Forum

- Gavin Jones (Intellect & Smart Grid GB)

11:10–11:20 Observations from the RIIO-T1/GD1 CCG

-Simon Roberts (Centre for Sustainable Energy)

11:20-11:35 Break and coffee

11:35-12:35 Break-out session

12:45- 1:00 Next Steps and getting involved – Anna Rossington

Welcome and introduction to RIIO

Hannah Nixon

Senior Partner, Smarter Grids and Governance: Distribution

Ofgem

4

RPI-X was not broken, but RIIO introduced as new “fit for purpose”

framework

Improved quality

of service

Increased

Investment

delivered significant benefits for consumers:

Networks focused

on short term

Limited consideration of

innovation and how best to deliver

Potentially limited

appetite for risk

Bias for „capex‟ solutions rather

than non-network options

BUT stakeholders suggested framework led to:

Networks focused on

Ofgem not customers

Limited focus on „cross-

sectoral‟ interactions

RIIO: Background

Reductions in

network charges

More efficient

financing

Improvements in

operating efficiency

RPI-X used as basis for regulating energy networks for about 20 yrs

5

Electricity networks Gas networks

Decarbonised electricity sector

Security of supply

Ag

ein

g a

ssets

Affo

rd

ab

ility

Offshore networks

Electric vehicles

Electric heating

Smart grids

Electricity storage

New nuclear

Renewables

Smart Grids

Local generation

Energy efficiency

District heating

Fuel poor

Climate change adaptation

Energy servicecompanies

CCS

European hub

LNG

Renewable gas

Uncertain demand

Networks face challenges and opportunities

6

Constraint set up front to ensure:

Revenue

Deliver outputs efficiently over time with:

Incentives

Technical and commercial innovation encouraged through:

Innovation

Outputs set out in clear „contract‟, reflecting expectations of

current and future consumersOutputs

=

+

+

Timely and

efficient

delivery

Network

companies are

financeable

Transparency

and

predictability

Balance between costs

faced by current and

future consumers

8 yr control Rewards/penalties for delivery Upfront efficiency rate

Core price control

incentives

Option to give third parties

a greater role in delivery

Innovation

stimulus package

RIIO: A new approach to regulation

7

The outputs-led framework

We are committed to developing clear and comprehensive outputs

These will help deliver the objectives of RIIO to encourage network companies to

Play a full role in the delivery

of a sustainable energy sector

Deliver long-term value for money network

services for existing and future consumers

Environmental impact: Help to reduce direct/indirect GHG emissions

Customer satisfaction: Maintain/increase customer satisfaction levels

Connections: Connect customers in a timely and efficient way

Safety: Provide a safe network in compliance with HSE standards

Reliability and availability: Promote reliability e.g. less interruptions

Social obligations: Treatment of vulnerable customers and fuel poor

RIIO includes

six output

categories

within which

network

companies

should deliver

8

Additional certainty to investors

RIIO includes principles for the development of a set of sustainable long-term

financeability parameters which will support future required investment

Capitalisation policy based

on equalising incentives

between operating and

capital expenditures

Asset lives based

on the average

expected economic

life of the asset

Use of CAPM and

other approaches

to determine the

cost of equity

Cost of debt based

on a long-term

trailing average

Gearing based

on company

risk exposure

Onus on companies to manage

short-term requirements and

provide equity if necessary

For other financial elements we are largely proposing to follow established

policies and procedures

9

Innovation stimulus

RIIO has a number of elements that are designed to drive innovation

Longer price

control period

Outputs

focus

Strong efficiency

incentives

Companies can propose

innovation in business plans

Also includes two Network Innovation Competitions for gas and electricity

** Electricity distribution will be included in the innovation stimulus in 2015

Ap

ril

20

13 NIC: gas

transmission and

distribution

NIC: electricity

transmission

Low carbon networks

(LCN) fund: electricity

distribution **

Funding available to third parties to allow

them to lead innovative network projects

Funding for all types of

innovation e.g. R&D, trials

Network innovation allowance included within revenue allowances

10

Well justified business plans

Companies will be required to develop well-justified business plans setting out

Companies will need to:

• justify their strategy for output delivery against an understanding of the long-term

trends they face

• show they have considered a range of stakeholder views and opportunities for

innovative approaches

• include a holistic view of the price control package including financeability metrics

How they will deliver in

the interests of current

and future consumers

How they will meet the

challenge of moving to

a low carbon economy

A strategy for

dealing with risks

and uncertainties

Under a proportionate approach the intensity and timing of assessment will

reflect the quality of business plans and company records for output delivery

High quality

business plan

Lower level of scrutiny

For a very high quality business

plan we may fast-track a company

and conclude its price control early

11

RIIO–T1 and GD1

Dec 10 Dec 11 Aug 12Apr 11 Aug 11 Apr 12 Dec 12 Apr 13

Strategy Stage

Focus on developing

outputs and strategy

for the review

Business plans

Initial sweep of

business plans

Fast-tracking

Final proposals for

fast-tracked

companies

Final Proposals

Final proposals for

all other companies Im

ple

men

t

Throughout: Effective stakeholder engagement by us and network companies

RIIO implemented first through the transmission and gas distribution price control reviews. Price controls will start April 2013

12

Sta

keh

old

er

en

gag

em

en

t

Bu

sin

ess

pla

ns

Treatm

en

t

Companies presented very different styles of plan

Significantly more detail published – greater level of transparency

Evidence of how stakeholders have informed those plans

Evidence of longer-term thinking

Consideration of innovation in developing the plans

Significantly more engagement than in previous price control processes

Companies increased stakeholder bases and developed strategies for engagement

Evidence of companies considering internal processes for engagement

Companies could still improve – this is an area for ongoing development

Extended initial sweep for RIIO-T1 recognising unfamiliarity with process

RIIO-T1: two companies’ plans considered suitable for fast tracking

In RIIO-GD1 material issues with all plans that could not be resolved within the fast-

track process

RIIO–T1 and GD1

RIIO implemented first through the transmission and gas distribution price control reviews. Price controls will start April 2013

13

RIIO-ED1 key messages

• RIIO is a new way of regulating – and means the electricity distribution companies will need to change how they approach the price control review

• Companies will need to think long term and strategically about how they will operate in the future

• The development of outputs and policy is not a competition –companies need to collaborate and engage to solve key issues

• Stakeholder involvement is key – and should be reflected in the companies’ well justified business plans

Overview of RIIO-ED1

Anna Rossington

Head of RIIO-ED1

Ofgem

15

RIIO-ED1 launched

2012 2013 2014

Launch consultation:Feb 2012

Initial Strategy consultation:Sept

Strategy Decision: Feb

Business plans submitted:May

Fast track ConsultationNov

Fast track Decision: March

Initial Proposals:June

Final Proposals: Nov

policy development

Implementation of RIIO model in electricity distribution

8 year price control: 1 April 2015 – 31 March 2023

Process will build on learning from RIIO-T1&GD1

Policies will build on DPCR5, and initiatives such as Smart Grids Forum

consultation

question:

benefits of 9

years

16

DPCR5

Current price control (DPCR5) precursor to RIIO framework:

• Run in parallel to RIIO development

• Recognised need for DNOs to anticipate low carbon future

• More focus on outputs

• Targeted customer focussed DNOs

Some of the current incentives and mechanisms may be fit for purpose,

and therefore require little change for RIIO-ED1

consultation

question: which

ones?

17

RIIO-ED1 Key Policy Challenge

standard asset life

2020 targets

ED1 ED2

Driving factors• Feed-in tariffs• RHI• Other incentive mechanisms• Local planning rules• Technological developments & reductions in cost

Facilitating factors

• Investment to expand and reinforce the distribution network

• Greater use of smart grid technology & DSR to maximise network flexibility at minimum cost

uncertainty around the characteristics, rate and

location of take-up of these technologies

Issues to consider for ED1

• DNO approach to developing business plans – scenarios and investment justification

• Outputs DNOs are required to deliver – longer term?

• Barriers to DNOs adopting commercial arrangements to manage demand and generation output

• Incentives and uncertainty mechanisms

Ensure low carbon technologies can connect in appropriate time at appropriate cost

consultation

question: do you

agree this is a

major issue?

18

The outputs-led framework

Environmental impact: Help to reduce direct/indirect GHG emissions

Customer satisfaction: Maintain/increase customer satisfaction levels

Connections: Connect customers in a timely and efficient way

Safety: Provide a safe network in compliance with HSE standards

Reliability and availability: Promote reliability e.g. less interruptions

Social obligations: Treatment of vulnerable customers and fuel poor

Issue of flexibility and capacity to enable timely and appropriate cost

connections will factor into multiple output categories

Ofgem / DNO /

stakeholder

working groups

will work to

develop these

for September

consultation

We are addressing flexibility and capacity as a separate work stream that

feeds / links with other areas

19

Smart meters

• Facilitate operation of smarter networks

• But range of challenges for ED1

– DNOs likely to incur costs for resolving operational issues uncovered during installation

– Meter replacement likely to uncover issues affecting the accuracy of the data used for balancing and settlement

2015 2016 2017 2018 2019 2020 2022 20232021

Planned completion date for rollout

Duration of ED1 price control

Issues to consider for ED1

• Costs appropriately borne

between competitive supplier

mechanisms and price

controlled DNOS

Issues to consider for ED1

• How does this affect losses

incentive which uses

settlement data as input?

• Note: once smart meters in

place, accurate losses

measurement

20

Other key issues

Some decisions taken as part of RIIO / RIIO-T1&GD1:

• Cost of debt (based on long-term trailing average)

• Asset lives (now 45 years)

• Innovation stimulus – Network Innovation Competition, Network Innovation Allowance

Other areas will need more development

• Toolkit approach to cost assessment

– totex analysis (ie comparable analysis of high level costs),

– assessment of innovative solutions/avoidance of investment,

– determining appropriate cost drivers, regional factors and

– treatment of insourcing versus outsourcing

consultation:

welcome views

on how we can

improve

21

Well justified business plans

Companies will be required

to develop well-justified

business plans setting out

How they will deliver in

the interests of current

and future consumers

How they will meet the

challenge of moving to

a low carbon economy

A strategy for dealing

with risks and

uncertainties

Use RIIO-T1/GD1 guidance as

a basis

Scope for further development:

• scenarios

• common methodology for

justifying investment

• consistency and ease of

navigation

• level of disclosure

consultation:

welcome

feedback on

process

22

GEMA

Exec

Hannah Nixon

Senior Partner

Distribution

Anna Rossington

Head of RIIO-ED1

Peter Trafford

Head of Reg Finance

Chris Watts

Ass. Partner Cost &

Outputs

James Hope

Head of Electricity

Distribution Cost

& Outputs

Dora Guzeleva

Head of Networks

Policy, Local Grids

James Veaney

Head of

Distribution Policy

Senior Legal

Adviser

Senior

Communications

Manager

Project

Manager

Distribution

policy

support

team

Cost &

outputs

support

team

Reg finance

support

team

RIIO-ED1 organisation

chart

Support services

Customers, connections,

social

Environment,low carbon, smart grids, innovation

23

Questions ?

Company view

Stephen Stewart

SP Energy Networks

Smart Grids Forum

Gavin Jones

Intellect and Smart Grid GB

Smart Grids Forum member

Observations from the RIIO-T1/GD1 Consumer

Challenge Group

Simon Roberts

Centre for Sustainable Energy

RIIO-T1/GD1 CCG member

Coffee & Break out discussions

11:35–12:35 Break out discussions

3 groups:

Group 1: Flexibility and capacity – Dora Guzeleva

Group 2: Connections – James Veaney

Group 3: Sustainability – Phil Sumner, Anna Rossington

- your allocated group is on your name tag

- Group 1 – George Thomas room (here)

- Group 2 – room 104

- Group 3 – room 101

Next Steps and Getting Involved

Anna Rossington

Head of RIIO-ED1

Ofgem

29

Next Steps: A reminder of the timetable

2012 2013 2014

Launch consultation:Feb 2012

Initial Strategy consultation:Sept

Strategy Decision: Feb

Business plans submitted:May

Fast track ConsultationNov

Fast track Decision: March

Initial Proposals:June

Final Proposals: Nov

policy development

Launch consultation closes 2 April 2012

30

How to get involved: Ofgem‟s approach to stakeholder engagement

Flexibility & capacity

Environment

broad

technical:Working Groups

policy development

Reliability and safety

Connections

Customer and social

issues

Finance

Losses

Innovation

Cost assessment

Price control review forum

Consumer challenge group

consultations consultations

31

• Companies need to know what their customers want, so they can put in place plans that will deliver that, and defend those plans with Ofgem.

• Some issues are company-specific.

• You have heard from one of them today, but they will all be engaging with you over the next few months.

Not just Ofgem: Each company will run its own stakeholder process

32

Best way to get your voice heard depends on the issue(s) you want to raise

I want to: Best approach:

Get into detailed discussions on specific issues e.g. Connections

Ask to join the relevant working group

Raise a general issue, or table a proposal

Submit a paper or question to thePCRF, or a person on it

Place views on public record Respond to a written consultation such as the one in September

Discuss an issue that only applies to one company

Contact company directly through its own stakeholder process

33

Breakout groups – key points

34