A recent article authored by Brattle Principals Peter Fox-Penner, Dan Harris, and Serena Hesmondhalgh that discusses Great Britain’s new approach to electric and gas network regulation was featured in the October issue of Public Utilities Fortnightly.
As the electric industry has entered an era of low-to-negative sales growth alongside high, policy-driven investment requirements, significant network reinforcement is needed as generation resources become more diverse. In the article, the authors discuss how grid operators will need smart grid innovations to manage price-responsive loads, and grid operators are particularly affected since they remain price- or revenue-regulated (or publicly owned), yet they are often given responsibility for delivering on policy outcomes.
To address this situation, the electric and gas regulator of Great Britain (Ofgem) has launched a new approach to electric and gas network regulation known as RIIO, or “Revenue = Incentives + Innovations + Outputs.” It is an experiment in performance-based regulation (PBR) and under the framework, Ofgem plans to transition to a low-carbon economy in order to better deliver value to energy consumers in the long run.
The article highlights the framework of RIIO, which is a three-pronged approach that each of the UK’s 14 distribution energy network operators (DNOs) and three transmission system operators must submit to Ofgem. The plan consists of a set of license amendments that amount to regulatory approval of three sets of financial controls. The authors point out that RIIO’s long planning period, along with its many framework pieces make it hard to predict whether this approach will work in the long term. They agree, however, that this regulatory plan effectively reflects the essential and highly-complex role of energy distribution networks in the emerging low-carbon economy.
The article, “A Trip to RIIO in Your Future?” can be downloaded below.