The new model includes extending price controls for energy networks to eight years from five years, in order to give long-term certainty to investors and keep investment costs for consumers as low as possible.
While the need to invest is likely to increase bills, taking a longer-term approach to price controls with greater emphasis on incentives to encourage more efficient investment has the potential to reduce the investment bill for consumers, Ofgem said.
Alistair Buchanan, chief executive of Ofgem, said: “If Britain’s energy networks are going to meet the challenge of delivering a low carbon economy then we need them to have innovation in their DNA.
“To bring about this change Ofgem is seeking to make regulation smarter by placing more emphasis on financial incentives to deliver efficient innovation and investment over a longer timescale.”
Ofgem’s new proposal is to deliver a sustainable network regulation by using a new price control model RIIO (Revenue=Incentives+Innovation+Outputs). The package is expected to provide a fairer and transparent approach to financeability for more clarity and predictability to companies and investors.
This model builds on the success of the RPI-X regime, but better meets the investment and innovation challenge by placing more emphasis on incentives to drive the innovation needed to deliver the required outputs in terms of improved customer service and smarter grids, the regulator said.
Key features of the RIIO model include much greater say for network customers, introduction of fast track price controls, more intrusive regulation for poorly performing companies, stronger incentive regime to encourage more efficient investment and innovation, greater role for new network companies in delivering certain large-scale projects, and expansion of the current low carbon networks fund.
