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RIIO-ED2 Sector Specific Methodology Consultation

We set price controls on the companies that run the gas and electricity networks in Great Britain to ensure that current and future consumers get the network services they require at a fair price.  We do so through the RIIO model, where we set network company Revenues using Incentives to deliver Innovation and Outputs.

In December 2019, we published our decision on the Framework that would inform our design of the five-year price controls for electricity distribution (RIIO-ED2) that will start in April 2023. We are now consulting on the detailed sector methodology that we will use to apply this framework and help to set these price controls 

The consultation period will close on 1 October 2020. Please send all responses by that date to RIIO2@ofgem.gov.uk

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Ofgem proposals to ‘turn your street green’, transforming local electricity networks

  • Proposals to unlock investment and secure the capacity to support up to 11 million electric vehicles projected to be on the road by 2030 and increased demand for heat pumps.
  • New measures for local networks to support rising electricity demand in smarter ways, including through new technology like battery storage.
  • Fairer balance between shareholders and consumers, delivering investment to support a greener emissions-free Britain while keeping costs as low as possible. 

Ofgem has today set out its proposals to rewire Britain at a local level to deliver a greener and fairer energy system for British consumers. (1)

Electricity distribution networks, which transport electricity locally to Britain’s homes and businesses, have a crucial role in eliminating harmful carbon emissions from GB’s energy sector in line with Government targets. (2) As Britain moves to greener forms of heating and transport, and more households and businesses produce their own local clean energy (3), local networks will have to expand their role and capacity to manage new sources of demand and an increase in electricity flowing through the grid. (4)

Ofgem is now consulting on the methodology for the next price control for the local electricity networks, which runs for five years from 2023. This follows proposals earlier this month on the price controls for the gas and electricity transmission and gas distribution operators.

Unlocking green investment

Ofgem’s proposals aim to unlock the investment needed to ensure the local electricity networks can drive forward green energy and transport for GB. This will help deliver the capacity and charging infrastructure needed to support a projected 11 million extra electric vehicles on our roads by 2030, as well as the infrastructure needed to deliver clean heat to GB’s homes and businesses and help connect the increase in renewable energy being produced locally.

This includes proposals to help companies speedily and reliably upgrade the network in anticipation of forecasted increases in local demand for electricity.(5)  

This also includes a new strategic innovation fund across all energy networks, worth an initial £450 million, to help drive more research and development into green energy. 

A system wide ‘net zero’ fund – proposed in our recently published draft determinations for the transmission and gas distribution sectors – will unlock significant, potentially unlimited, additional funding to drive good value green infrastructure upgrades. Companies can access funding over the course of the price control as needed – provided they can make a robust business case.  This could fund for instance co-ordinated upgrades to the transmission and distribution power grids to enable a nation-wide charging network for electric vehicles.  

Managing energy flows

Ofgem is proposing measures to make sure that network operators can efficiently manage the electricity flowing through their grids, as increasing generation from local renewable sources requires them to take on greater system operation responsibilities.  

This includes requiring companies to grow their capacity using ‘flexible’ solutions where they can, such as battery storage or smoothing peaks in demand, rather than building expensive new network capacity.

It also includes increasing coordination and planning across the energy system, digitalisation of the energy system, and making better use of electricity network companies’ data – including sharing this with flexibility providers.

Flexible solutions can be less expensive for consumers and delivered quicker. According to Ofgem analysis if owners of electric vehicles use ‘flexible’ charging – where they only top up outside peak demand times on the grid – at least 60% more electric vehicles could be charged up using existing capacity compared with vehicles charged only at peak time. 

Cutting costs to consumers

In common with Ofgem’s approach to the wider RIIO-2 price controls, we expect to see lower returns for investors in ED-2.  This means less of consumers’ money goes towards network companies’ profits, and more towards improving the network and fighting climate change. (6)

This package of measures will help keep the costs of delivering a green emissions-free economy for Britain as low as possible for consumers.

Ofgem’s CEO Jonathan Brearley comments:

“Our proposals will help turn Britain’s streets green, putting in place the wires and technology for families to travel in electric vehicles and heat their homes and businesses with clean energy.

“The green energy transformation is not just about putting more copper in the ground. We need a modern, digital grid that uses all our energy assets as efficiently as possible”

“Local electricity networks will be at the forefront of eliminating harmful carbon emissions from the country, helping tackle climate change, so it’s vital they have the investment they need to do this whilst keeping costs as low as possible for consumers.”

Notes to editors

Please see our RIIO2 Electricity Distribution Methodology Consultation for more details.

(1) Ofgem’s five-year price controls set the framework and the revenue that each of GB’s 14 Distribution Network Operators (DNOs) can earn from charges on consumers’ energy bills. The average GB customer currently pays around £90 per annual to meet the costs of operating, maintaining and reinforcing these local grids. 

(2) Last year the UK Government legislated to cut the UK’s carbon emissions down to ‘net zero’ by 2050. Welsh and Scottish Governments also have made net zero commitments. 

(3) To achieve ‘net zero’: 11 million more electric vehicles  by 2030 (National Grid Future Energy Scenarios); by 2035 all replacement heating systems should be low carbon or ready for hydrogen; over 8m hybrid heat pumps are projected to be adopted, responding  to market signals and shifting demand between hydrogen and electricity systems by 2050 (National Grid Future Energy Scenarios 2020); the electrification of sectors such as transport and heating could result in a doubling of electricity demand by 2050, with all power produced by low-carbon sources (Committee for Climate Change 2020)

(4) Currently 34% of GB’s electricity comes from renewable sources (Committee for Climate Change 2020); since 2015, 10GW of distributed electricity generation from small scale generators has connected to the grid. DNOs have been taking on roles and responsibilities more traditionally associated with the system operator, such as liaising with local storage providers, to manage the increase in energy from diverse sources coming onto the grid.

(5) We are consulting on four different models to enable strategic green investment to drive forward ‘net zero’ carbon emissions by local network companies. These explore whether a centralised or decentralised approach to planning is best and whether there is sufficient certainty to provide funding at the outset of the price control or to link it to uncertainty mechanisms that will provide funding over the course of the price control as needed. These models are not mutually exclusive and could be deployed in parallel to address different types of strategic investment requirements.

(6) When calculating the allowed return on equity for electricity distribution companies, Ofgem will apply the same methodology it has set out for gas/electricity transmission and gas distribution price controls. 

When applied to the transmission and gas distribution sector, this resulted in allowed return on equity of 3.95% – approximately half that of the current price control. However, this calculation cannot be accurately forecast for the electricity distribution price control as the allowed return includes, for example, market-based indexation which will occur over the next two years to 2023 when this price control starts.

Media contacts

For media, contact Ruth Somerville: 020 7901 7460 / 07990 139504 / ruth.somerville@ofgem.gov.uk

Media out of hours mobile: 0792 882 9894 (media calls only)

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EnBW Energie Baden-Württemberg AG- Notice of application for a Gas Shipper licence

EnBW Energie Baden-Württemberg AG hereby gives notice that it has made an application to the Gas and Electricity Markets Authority for a gas shipper licence.

The closing date for comments on this licence application is 29 July 2020. Please contact Licensing@ofgem.gov.uk.

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Orsted Hornsea Project Four Limited- Notice of application for an electricity generation licence

Orsted Hornsea Project Four Limited hereby gives notice that it has made an application to the Gas and Electricity Markets Authority for an electricity generation licence.

The closing date for comments on this licence application is 26 August 2020. Please contact Licensing@ofgem.gov.uk.

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Microbusiness Strategic Review: Policy Consultation

This policy consultation sets out our proposals to address a number of key harms faced by microbusinesses in the retail energy market as identified by our Microbusiness Strategic Review.

We are consulting on introducing each of the following measures as part of a package of reforms designed to improve microbusinesses experience of the market:

  • Broker conduct principle: Introducing  a principles-based requirement for suppliers to ensure brokers they work with conduct themselves appropriately
  • Broker dispute resolution: Introducing a requirement for suppliers to only work with brokers signed up to an alternative dispute resolution scheme
  • Informed contract choices: Applying targeted sales and marketing rules to suppliers and brokers they work with via supply licence changes
  • Broker commission transparency: Clarifying and strengthening existing supply licence obligations to provide information about broker commission payments on contracts, bills and account statements
  • Cooling-off period: Introducing a 14 day cooling-off period for microbusiness contracts
  • Contract extensions: Requiring suppliers to maintain existing contract rates for up to 30 days while issues with a blocked switch are being resolved
  • Banning notification requirements: Banning suppliers from requiring microbusinesses to provide notice of their intent to switch

In addition, we propose to work collaboratively with leading consumer groups to improve awareness raising materials and information provision.

We want to hear from anyone interested in this consultation. Please send your response to cdconsultations@ofgem.gov.uk by close on 23 October 2020. We also intend running a number of stakeholder events in September and October, in addition to gathering information from written consultation responses and will share more details about these events shortly.

Subject to responses we intend publishing a statutory consultation in winter 2020/21 and for changes to be implemented later in 2021.

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Fairer energy deals for microbusinesses

  • Ofgem proposes measures for millions of microbusinesses to get a fairer energy deal 
  • Package of support would help tackle unscrupulous brokers, strengthen dispute resolution, and deliver smoother switching
  • Fairer energy bills more important than ever as microbusinesses recover from the impact of COVID-19 

Ofgem has unveiled plans to tackle unscrupulous energy brokers so millions of microbusinesses can get a better deal1.

Two out of three microbusinesses use an energy broker when choosing their current energy contract and many of them benefit from the advice of a reputable broker. However, an Ofgem review found that in too many cases, microbusinesses are hampered by a lack of transparency when using brokerage services and end up being locked into poor value deals because they are not fully aware of what they are signing up to2.

Ofgem found that a small number of microbusinesses were paying thousands more than they needed to in broker commission charges. These proposals will help all those using a broker to get value for money when using brokerage services. 

Today’s proposals will make shopping around for an energy deal simpler, quicker, and fairer for microbusinesses. 

The proposals would require suppliers to ensure that brokers they work with conduct themselves appropriately when interacting with customers and to make commission fees and key contract details clearer. 

Where things go wrong, microbusinesses will be able to resolve disputes with energy brokers through an independent body3

Microbusinesses will also find it easier to switch as administrative barriers are removed. 

Philippa Pickford, Ofgem’s Director of Future Retail Markets, Consumers & Markets said:

“Providing greater transparency and tackling unscrupulous brokers will help microbusinesses get a better, fairer energy deal. This is more important than ever as microbusinesses emerge from the challenges posed by the Covid-19 pandemic.

“These proposals are part of Ofgem’s wider work to improve the energy retail market through smart metering, extra support for vulnerable customers, plus faster and more reliable switching”.  

Case studies

Case study 1

A Business Energy Claims (BEC) case study appears to show a broker only offering one deal to a golf club despite claiming it would search the entire market. It later transpired that the deal contained ‘hidden’ commission of 50% of the golf club’s energy spend, and the microbusiness felt the five-year length of the contract was not made clear. BEC estimate that the golf club owed £24,000 in ‘hidden’ commission charges.      

Case study 2

A further BEC case study4 showed that Stranton Social Club’s energy bills included 41% commission to a broker, which was not disclosed at the point of sale, nor disclosed or documented on bills or on the contract. 

Notes:

(1) According to UK Government data, there were over 5.6 million microbusinesses in the UK by 2019, accounting for 96% of all businesses, 33% of employment and 22% of turnover. For these measures, microbusinesses are defined as non-domestic consumers who have fewer than ten employees, with an annual turnover of less than 2 million euros, or use no more than 100 MWh of electricity per year, and/or no more than 293 MWh of gas per year. Not all microbusinesses have a non-domestic energy supply contract, but we estimate that our proposals will help the approximately 1.5 million microbusinesses with a non-domestic electricity or gas supply contract to secure a fairer deal.

(2) In 2019 Ofgem announced a strategic review of the microbusiness retail energy market. Ofgem has since gathered robust evidence by analysing industry data, and from listening to microbusinesses and key stakeholders.

(3): The package of measures set out in the policy consultation includes: 

  • Broker conduct principle: Introducing a principles-based requirement for suppliers to ensure brokers they work with conduct themselves appropriately
  • Broker dispute resolution: Introducing a requirement for suppliers to only work with brokers signed up to an alternative dispute resolution scheme 
  • Informed contract choices: Applying targeted sales and marketing rules to suppliers and brokers they work with 
  • Broker commission transparency: Clarifying and expanding existing supply licence obligations to provide information about broker commission payments on contracts, bills and account statements
  • Cooling-off period: Introducing a 14 day cooling-off period for microbusiness contracts 
  • Contract extensions: Requiring suppliers to maintain existing contract rates for up to 30 days while a switch is being processed
  • Banning notification requirements: Banning suppliers from requiring microbusinesses to provide notice of their intent to switch 
  • Information: Ofgem also intends working collaboratively with leading consumer groups to improve awareness raising materials and information provision. 

 (4) Business Energy Claims announce court win against Utility Alliance

Further information

For media, contact Michael Anderson: 020 7901 7079

Media out of hours mobile: 0792 882 9894 (media calls only)

About Ofgem

Ofgem is Britain’s independent energy regulator. Our role is to protect consumers now and in the future by working to deliver a greener, fairer energy system. We do this by:

  • working with Government, industry and consumer groups to deliver a net zero economy at the lowest cost to consumers.
  • stamping out sharp and bad practice, ensuring fair treatment for all consumers, especially the vulnerable.
  • enabling competition and innovation, which drives down prices and results in new products and services for consumers.
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Forbury Assets Limited’s proposed Safety and Security of Supplies Enquiry Service Statement

Forbury Assets Limited (FAL) submitted its proposed Safety and Security of Supplies Enquiry Service Statement to us as part of their licence application process. FAL subsequently submitted a final version on 15 May 2020 once they were granted an electricity distribution licence.

We have decided to approve the statement.

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Determination- Outage Cost Adjusting Event for 2019-20

The Gas and Electricity Markets Authority (the “Authority”) has considered the Notice submitted by National Grid Electricity System Operator Limited (NGESO) under Part B of SpC 4J on 28 April 2020. The Notice sets out the proposed income adjustment for 2019-20, resulting in £894,640.04 of outage change costs and £1,473 of total commercial operational services costs being incurred.

This letter sets out our determination of the allowed outage cost adjustment (IONTt) value for 2019-20 of (minus) -£2,193,366.16 as proposed by NGESO. This is the reduction in NGESO allowed revenue as the outage cost adjusting event.

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Ofgem closes compliance engagement with E (Gas and Electricity) Limited in relation to transfer blocking

Ofgem has closed compliance engagement with E (Gas and Electricity) Limited (“E”) after the supplier incorrectly blocked 361 prepayment (PPM) customers who had received a discretionary credit from switching to another supplier. Following this engagement, E has committed to return the financial value of lost savings to all affected customers and has taken steps to ensure future compliance.

In order to support vulnerable PPM energy customers and keep them on supply, energy suppliers can offer customers a discretionary credit payment. This typically involves the supplier issuing a value of energy credit in advance which is later recovered from the customer in instalments from future energy top-ups. In late April 2020, Ofgem became aware that E had taken a decision to adjust its discretionary credit process as part of its Covid-19 response. In order to receive discretionary credit, customers were asked to enter an agreement to repay any credit value still owed to E before requesting a switch to another supplier. Approximately 5,300 customers entered into the agreement between 19 March 2020 and 13 May 2020.  The supplier made this change following a sharp rise in requests for discretionary credit which was triggered by the impacts of Covid-19. However, Standard Licence Condition (SLC) 14 prohibits suppliers from preventing a proposed customer transfer with the exception of specific circumstances described in the condition. The protections extended by the SLCs cannot be superseded by separate arrangements between suppliers and their customers.

E voluntarily stopped requiring customers to enter into the agreement after demand for discretionary credit returned to pre Covid-19 levels in early May 2020. We engaged with E to assess any financial detriment that customers may have suffered as a result of the agreement. E identified a total of 361 customers who attempted to switch energy supplier while bound to the agreement. E has agreed to credit a total sum of £1,840 to the affected customers. The supplier also released approximately 580 customers from the agreement who had not yet repaid the value of credit on 19 June 2020.

The ability for customers to readily switch energy supplier is a key element for effective competition in the energy market. Suppliers should not take any actions that prohibit customers from switching energy supplier other than those circumstances outlined in SLC14.

While Ofgem takes any non-compliant transfer blocking activity seriously, we consider that in this instance the return to compliance and the refunding of customers is sufficient to end our compliance engagement. We have taken this decision in line with the pragmatic approach to regulation during Covid-19 we set out in our Open Letter of 8 April, under which we endeavoured not to penalise suppliers for actions or decisions taken with the aim of protecting or supporting their customers.

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2020/2021 Black Start Strategy and Procurement Methodology: The Authority’s decision

This letter comprises the Authority’s decision to approve the new black start Strategy and Procurement Methodology (the “Methodologies”), submitted by the Electricity System Operator (“ESO”) on 3 April 2020. The Methodologies were submitted pursuant to Part A and Part B of Special Condition 4G of the ESO’s Electricity Transmission Licence. The Authority has determined to approve the Methodologies in accordance with Part C of Special Condition 4G.