How to Save the World or The RIIO-2 Price Control Mechanism
Toby Ferenczi, Director of Strategy, OVO
Sometimes you end up in places you never expected. Lately I’ve been spending a large amount of time reading up on a piece of UK regulation called ‘RIIO,’ which is the framework by which the energy regulator (Ofgem) sets how much money the energy network companies can charge consumers.
Energy network companies & RIIO
Energy network companies are the companies that own and operate the pipes and wires that bring gas and electricity to our homes and businesses. In the UK these are privately owned companies that hold a licence to operate in specific regions. Because they are monopolies (you can’t choose your network company) their revenues are regulated to ensure that consumers are treated fairly.
Historically, as our economy grew, so did the demand for electricity. In response, the network companies periodically provide Ofgem with their plans for investing in greater network capacity and as long as these are reasonable, they are allowed to pass on these costs to consumers via network charges. Recently however, all this has begun to change.
The energy transition
Energy use has in fact been falling since the early 2000s despite continued economic growth as we become more efficient. In addition, the whole energy system is fundamentally changing as it becomes becomes more renewable, distributed and intelligent, and consumers and businesses are able to generate, store and manage energy for themselves.
Renewable energy costs have now fallen to the point where they compete economically with fossil fuels. The challenge now is keeping the grid in balance when there are very large proportions of renewable energy on the grid and flexible energy technologies like storage and demand response are the key to enabling this. In addition, if we want to electrify and decarbonise the transport and heating sectors, we will need smart energy management platforms like VCharge to coordinate when EVs and electric heaters use energy.
So these flexible technologies will not only enable us to decarbonise power, heat and transport, they will make the energy system cheaper to run as a whole by making better use of the infrastructure we already have and reducing investment requirements. The problem today is that network companies are not incentivised to procure flexibility services over continuing to invest in new network capacity, and unless this changes, we won’t see the uptake of these smart, new flexible technologies that we all want.
That’s why we have launched our campaign, called Flexibility First, which calls on Ofgem to put flexibility services at the core of the new RIIO price control mechanism. By making some simple changes (for instance by setting the utilisation factor of their networks as a key performance metric) they will be incentivised to use flexibility from things like electric vehicles and smart heaters, rather than continuing to build expensive infrastructure. We have a small window of opportunity now to fix RIIO before it is fixed for another 8 years.
So whilst at first glance RIIO may seem rather technical and boring, its critical to changing how the network companies behave, which in turn is critical to decarbonising the power, transport and heating sectors, which together make up the vast majority of our carbon emissions as a society.
To read our full response to the RIIO 2 consultation click here.