Implementation of RIIO-GD1

Transcription

1 Implementation of RIIO-GD1 Paul Branston, Ofgem IGEM London & Southern Section 30 April 2013

2 2 Agenda Introduction to RIIO Principles Introduction to RIIO-GD1 Cost allowances Outputs Incentives Innovation

3 3 The industry is facing unprecedented change De-carbonisation Security of Supply Ageing Assets Affordability ELECTRICITY NETWORKS GAS NETWORKS Renewables / new generation Smart Grids Electricity storage Electric vehicles Energy efficiency Local generation Demand Side Management LNG

4 4 RIIO framework seeks to address these challenges Constraint set up front to ensure: Revenue = Incentives + Innovation + Outputs Timely and efficient delivery Network companies are financeable Transparency and predictability Balance between costs faced by current and future consumers Deliver outputs efficiently over time with: 8 yr control Rewards/penalties for delivery Upfront efficiency rate Technical and commercial innovation encouraged through: Core price control incentives Option to give third parties a greater role in delivery Innovation stimulus package Outputs set out in clear compact, reflecting expectations of current and future consumers

5 Totex approach to price controls RPI-X regulatory structure RIIO regulatory structure Total costs = capex + repex + opex Requires GDNs to demonstrate the way they had considered capex and opex solutions to problems and optimised to get to their proposed way forward. Requires clearer links between costs and outputs rather than costs and workload. What are the benefits the customer is getting from the proposed intervention? Cost Benefit assessment and Network Output Measures (NOMs) are two tools we used in our assessment of the GDN business plans. Source: NGG 2011/12 Annual report available at 5

6 6 RIIO-T1 and GD1 In December we published Headlines for RIIO-T1 and GD1 We set a package of measures for 8 years. Around 24 billion allocated to upgrade and renew Britain s gas and high voltage electricity networks. This will ensure that Britain s networks remain among the most reliable in the world. Investment is integral to secure Britain s future energy supplies and is part of the 200 billion identified as part of Ofgem s Project Discovery regarding security of supply. Ofgem s close scrutiny of companies plans secures project investment and ensures value for consumers Overall consumer impact: 12 per annum (approx 7 for GD)

7 7 RIIO-T1 and GD1 Delivering what stakeholders want The companies will be required to deliver through a combination of financial and reputational incentives: a safe network in compliance with statutory safety requirements a reliable network (role of Network Output Measures) Improvement in customer/stakeholder satisfaction informed by a survey connections to customers in a timely and efficient way a range of environmental measures including to reduce emissions (SF6, venting, transport losses), incentives to minimise Business Carbon Footprint. The proposals also contain a number of elements to promote innovation: o o o the longer price control period an outputs focus with strong efficiency incentives a time-limited innovation stimulus package

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9 9 RIIO-GD1 Outputs and Incentives Policy area Principal outputs / secondary deliverable Incentive mechanism Environment (broad measure) - report on percentage of biomethane capacity connected - new connection standards and provision of information for biomethane connections - separate process to consider connection boundary and charging arrangements for biomethane - reputational incentive in relation to biomethane connections - discretionary reward scheme (DRS) of up to 12m for companies that deliver environmental outputs not funded at price control review Environment (narrow measure) % reduction in gas transport losses - reductions in business carbon footprint (BCF), and other emissions and resource use - strengthened shrinkage allowance incentive and environmental emissions incentive (EEI) by: (i) aligning carbon value with DECC's non-traded carbon value, and (ii) introducing rolling incentive mechanism Customer service Social obligations Customer connections Safety Reliability - broad measure of customer service, comprising customer satisfaction survey, complaints metric, and discretionary reward for stakeholder engagement - connection of up to 80,000 fuel poor households - increased carbon monoxide (CO) public awareness - maintain current guaranteed standards - new connection standards of service for distributed gas entry customers during RIIO-GD % reduction in safety risk - compliance with statutory health and safety requirements - expected number and duration of interruptions - asset health/ risk scores - achieving 1 in 20 capacity obligation - asset load/ capacity utilisation - maintaining operational performance - financial incentive of +/-1% of allowed revenue - fuel poor connections reviewed at the end of period; penalty for under delivery - comparative assessment of CO awareness; reward through stakeholder engagement - DRS for companies delivering outputs in relation to social objectives not funded at review - penalty payments through guaranteed standards of performance. -safety risk: review of output performance at end of RIIO-GD1, and requirement to carry-over under-delivery - statutory enforcement - asset health/ risk/ load: review of output performance at end of RIIO-GD1, and requirement to carry-over under-delivery

10 10 Other Financial Incentives As well Output targets and efficient totex costs set out in Final Proposals and the Licence there are a number of additional financial incentives in the RIIO-GD1 package: IQI Information Quality Incentive (IQI) to incentivise GDNs to reveal their efficient costs. Sharing Factors - The sharing factor is c37%. This is the bit that the consumer funds (of an overspend) or shares (of an underspend).

11 Broad Measure of Customer Service 11 Customer Service Incentive Objective Financial exposure Guaranteed Standards of Performance (GSOPs) Customer Satisfaction Survey Connections Unplanned interruptions Planned interruptions Complaints Metric Stakeholder engagement incentive Establish a minimum level of service and compensate customers that do not receive this. Drive the GDNs to satisfy the needs of customers that have an interaction with the organisation. Encourage the GDNs to resolve complaints to the customer s satisfaction quickly and effectively. Encourage the GDNs to engage with range of stakeholders and use feedback to inform how they run their business. Payment dependent on GSOP. +/- 0.5 per cent of base revenue -0.5 per cent of base revenue +0.5 per cent of base revenue

12 12 Social Objectives Incentive Objective Financial Exposure Discretionary Reward Scheme Fuel Poor Network Extensions CO Awareness survey Wide ranging: Incentive to reward the sharing of best practice and improve CO awareness. Incentivise GDNs to develop non-network solutions for fuel poor, by rewarding GDNs for working with other parties in the sector (electricity distributors, suppliers, technology providers). Incentive for GDNs to develop voluntary GSOPs for Distributed Gas connections. We will fund the GDNs proposals to connect around 77,000 fuel poor households to gas network over RIIO-GD1. Incentive for GDNs to increase public awareness of the risks of carbon monoxide (CO) poisoning. 12 million across RIIO- GD1. - Reputational only

13 13 RIIO Process review of NOMs and Outputs In their business plans, Companies... commit to achieving forecast level of network risk; identify most efficient intervention options; and forecast likely costs Ofgem assesses quality of plans and efficiency Ex-ante totex allowance Other lagging indicators eg. Fault/failure rates Ongoing monitoring - sharing factor applied to under/overspends End of period review (2020/21) unjustified under-delivery penalised and output gap rolled forward, justified over-delivery rewarded

14 14 Forward looking: Companies take greater responsibility for appropriate asset management decisions and intervention and the safety and reliability of their networks. Companies can demonstrate that delivery is at efficient cost over the longer-term (whole-life costing, value for money) Companies have appropriate information and decision support tools in place to make asset management decisions. They can justify them to regulators and customers. Aspirational goal to have a measure of risk that can be used across different types of assets (e.g. Pipelines, AGIs). in the meantime looking for companies to be able to articulate the key trade-offs they are having to make.

15 15 How do we incentivise innovation? Electricity Distribution (DPCR5) Gas Distribution Electricity & Gas Transmission (RIIO-T1 and GD1) Innovation Funding Incentive Technical research and R&D Business as usual Efficiency incentive and output delivery Network Innovation Allowance Small scale innovative demonstration or R&D projects LCNF Tier 1 Small-scale innovative demonstration projects Network Innovation Competitions Large scale innovative development and demonstration projects LCNF Tier 2 (competition) Large-scale innovative demonstration projects Innovation Rollout mechanism Price control uncertainty mechanism Electricity Distribution will move to the RIIO principles from 2015

16 16 Overview of the three components of the Network Innovation Stimulus Network Innovation Allowance (NIA) - The NIA is a set allowance that each of the RIIO network licensees will receive to fund small-scale innovative projects as part of their price control settlement. Network Innovation Competition (NIC) - The NIC is an annual competition for funding larger more complex projects. The NIC will comprise of two competitions - one for gas and one for electricity. Projects must demonstrate low carbon or environmental benefit. Innovation Roll-out Mechanism (IRM) - A Revenue Adjustment Mechanism that enables companies to apply for additional funding within the price control period for the rollout of initiatives with demonstrable and cost effective low-carbon or environmental benefits.

17 17 Network Innovation Allowance key features Companies will receive an allowance of between 0.5% and 1% of their revenues (determined based on the quality of their innovation strategy) Set allowance on a use it or lose it basis Innovative projects (not limited to low carbon or environmental) Self registration of projects against eligibility criteria in NIA governance document Companies must fund up to 10% of project costs themselves Publish information on specially designed portal ensure learning dissemination May use a proportion of NIA for NIC bid submission costs

18 18 Network Innovation Competition key features Electricity - 27m pa LCNF and NICs will run in parallel TOs, OFTOs from 2013 Cross sector projects possible DNOs and IDNOs from 2015 Differences with LCN Fund Gas - 18m pa TO, GDNs, IGTs from 2013 Project scope and funding licensees involvement max. 5 per licence group max. 2 per licence group Initial Screening Process (ISP) pass/fail assessment by Ofgem against ISP criteria Full Submission review by Expert Panel against NIC criteria GEMA decision April August November

19 19 Collaboration We expect the companies to collaborate on NIC and LCN fund projects with a range of project partners The governance arrangements have been designed with this in mind Both NIC, NIA and LCN Fund have chapters on collaboration requirements Collaboration and learning portal Running by October 2013 Provide access to project information and learning, key contacts Annual conference LCN Fund 2012 conference in Cardiff was very well attended, 2013 conference TBC Innovation stimulus conference from 2014 ISP requirement Under value for money criterion licensee must explain how project participants have been identified and selected and the rationale for selecting Project Partners and ideas

20 20 This year s competitions (ISP in process) Competition Number of bids Total value ( m) Funding available ( m) Electricity NIC Gas NIC LCN Fund

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