Preparing for an accelerating, decentralised energy system

Steven McMahon

Steven McMahon

Deputy Director, Electricity Distribution & Cross Sector Policy
17th December 2020
Areas covered:
Electricity
Gas
electric vehicle charging

Our energy demands are rapidly changing.

More and more of us are replacing petrol and diesel vehicles with electric cars. Households and business are switching to new sources of heating. Governments in the UK, Scotland, and Wales are signalling their determination to hit net zero targets. This week, the Energy White Paper set out new ambitions for hydrogen and a ‘world-beating commitment to deliver 40GW of offshore wind by 2030’. 

These changes will of course usher in an increase in energy demand. And all of that will require a more modern, smarter, digitally enabled grid that maximises the benefits from all available energy assets. And at the same time takes account of any related developments outside of energy networks. 

The local distribution grids are at the heart of an accelerating energy market.  

These grids are the local, lower voltage grids that move electricity from the transmission network into our homes and businesses. They also distribute an increasing quantity of power from generation sources that are connected directly to the distribution networks. In a nutshell, these networks are there to enable our energy needs to be met. They keep the lights on so that we have power as and when we need it. 

Increasingly too, the local electricity distribution networks will play a central role in supporting decarbonisation of the energy system and the wider economy. This is vital for the UK’s ambitions to hit net zero targets.  

Right now, our challenge at Ofgem is to make sure that our regulation enables the local distribution grids to have the capacity needed to meet the demands of our ever-changing energy system - while ensuring appropriate protections for consumers.  

And that’s why today’s announcement is so important.  

Our new methodology for RIIO-ED2 sets the next price controls for Great Britain’s local electricity distribution networks from April 2023-28. These follow on from last week’s confirmation of the major investment programmes that we set out for the transmission, gas distribution and Electricity System Operator (ESO) price controls.  

Central to our new price controls for RIIO-ED2 are the outputs and incentives needed to make sure that the networks deliver the services that matter to all consumers, including individuals in vulnerable circumstances. 

The major aim will also be that the grids are able to accommodate an increased demand for electricity. This might require investment to increase capacity, but in the first instance we want the network companies to make the best use of existing capacity. This will include maximising the opportunities provided through a more decentralised, data driven energy system and harnessing the potential from smart technologies and growing flexibility resources, including battery storage or smoothing peaks in demand. 

We are putting in place requirements now for network companies to share more data and develop truly coordinated markets for these flexible resources. This will allow local providers of flexibility to more easily access new markets, while helping the distribution network companies manage their networks more efficiently. Our new price controls will build on these requirements, to incentivise continuing improvements in delivery. 

This efficient use of the energy system will help drive efforts to decarbonise heat and transport at a lower cost that would otherwise be the case. This will mean that we avoid building costly new network capacity where we can, while ensuring the networks operating and financing costs are as efficient as they can be. Taken together, these aims will be essential to ensuring net zero targets can be met at a cost that keeps bills low. 

We expect that our final decisions on the financial framework – including working assumptions on the cost of capital - will be taken in early spring 2021. As with our approach to our RIIO-2 price controls, we still expect to see lower returns for investors in RIIO-ED2. This will mean less of consumers’ money going towards network companies’ profits, and more towards supporting the increases in network capacity required to deliver net zero. 

At the same time, we have also been exploring opportunities to unlock investment within the existing RIIO-ED1 price control – especially when it comes to facilitating a green recovery while bringing forward decarbonisation benefits to consumers.  

That’s why £80 million of shovel-ready projects have been accelerated to start in 2020, as part of our efforts to increase capacity to support new connections as well as preparing the grids for net zero. Work is ongoing with the networks through the Energy Networks Association (ENA) to develop further options to stimulate low risk, low carbon strategic investment to support Net Zero and future users’ needs in line with government climate change ambitions. Further information on these options is expected early in 2021. 

Day by day, our energy landscape is changing. This of course creates challenges for the local grid operators, but it also presents fantastic opportunities to use the evolving system and technologies in more innovative ways.  

We’re confident that our regulation of the electricity distribution price control provides the right environment to allow the variety of opportunities to be realised, in a way that delivers net zero at the lowest cost to customers.