RIIO (Revenue using Incentives to deliver Innovation and Outputs) is Ofgem’s model in setting the price controls on the companies that run the gas and electricity networks in Great Britain to ensure that existing and future consumers get the network services they require at a fair price. RIIO involves setting designed to encourage energy network companies to:
- Play a full role in delivery of a sustainable energy sector
- Deliver value for money network services for existing and future consumers.
In 2013 the first round of RIIO began with price controls including the costs of “system operation” and in 2015 Ofgem set the price control for electricity distribution. In total, network companies will recover revenues of around £96bn over the RIIO-1 period.
RIIO -1 has worked quite well in network reliability, customer satisfaction with network operators, and innovation stimulus has increased R&D. However, assumptions, that seemed reasonable at the time Ofgem was setting the control, have not always played out as expected.
Proposals of the Framework are:
- Giving consumers a stronger voice:
In distribution, companies will be required to set up a Customer Engagement Group. In transmission, companies will be required to set up a User Group. Ofgem will set up an independent RIIO-2 Challenge Group of consumer experts.
- Responding to how networks are used:
Price control length is set to five years; The electricity system operator (ESO) price control will be separate from the National Grid Electricity Transmission’s (NGET’s) Transmission Owner (TO) control; Consumer protection against inefficient network investment and utilisation; the role of network companies in encouraging reduction in end use energy efficiency.
- Driving innovation and efficiency:
A proposal to extend competition across the sectors (electricity and gas, transmission and distribution), where it is appropriate and provides better value for consumers.
- Simplifying the price controls:
A description of setting outputs to recover revenues that companies were provided with but that are no longer required and how the cost allowances will be set to reduce the risk of forecasting error. How to get better information from the network companies, including the role of the Information Quality Incentive (IQI) and fast-tracking, and improving and simplifying the annual reporting process.
- Fair returns financeability:
Improvements in the approach to setting the cost of debt and proposed methodology to setting the cost of equity. Proposition to move away from using the retail price index (RPI) as an inflation measure and new mechanisms to ensure fair returns.
Ofgem will publish an initial business planning working paper in August 2018 as well as issue an open letter in relation to Annual Reporting, and will publish a consultation on the sector specific methodologies in December 2018.