Inventing the future: innovation in RIIO-2

Overview of our weekly publication – Energy Spectrum

Energy Perspective

Last week, we summarised Ofgem’s recently issued consultation on the framework for RIIO2. In this week’s Energy Perspective, we focus more closely on the component parts of the regulator’s latest thinking.

While the fact Ofgem has already flagged that network companies should expect to make lower returns is entirely appropriate, the next price control period and beyond will be a period of momentous change. The way the process of innovation is managed to respond to this will be critical to ensuring that appropriate investments are made and that the gas and electricity systems develop accordingly, particularly in electricity where the future for electrification of heat and transport is uncertain. The regulator’s current approach to innovation, in our view, appears to be taking a retrograde step when it should be looking at more innovative ways to encourage innovation.

Policy 

In our policy section, we examine the (limited) announcements on energy from the Spring Statement. The most interesting detail was from the Office for Budget Responsibility (OBR) whose outlook, published alongside the statement, forecast of environmental levy spend up to 2022-23. The basket of levies is slightly different from those included in the Levy Control Framework, and shows spend up to £12.8bn in 2022-23. This is lower than forecasts made in the Autumn Budget, by around £0.5bn/yr, due to revisions of Capacity Market spend following recent auction results.

We also look at the Public Accounts Committee’s (PAC) damning report into the Green Investment Bank (GIB). The PAC found the GIB failed to live up to original ambitions and that there is now no guarantee it ever will as its green intentions are not sufficiently protected.

Regulation

In our regulatory section, we review Ofgem’s plans to introduce price caps for all consumers on standard variable tariffs (SVTs) for next winter.  The document sets out how the regulator would implement the cap where directed by legislation, and an alternative approach should the Domestic Gas and Electricity (Tariff Cap) Bill not pass. The timescale looks challenging and there are still plenty of areas that are in need of attention to ensure the design of the cap provides appropriate price protection and adequately reflects supplier costs. It is clearly one of Ofgem’s highest priorities for this year.

Industry Structure

In this week’s industry structure section, we break down E.ON’s announcement that it had reached an agreement with RWE to acquire RWE’s 76.8% stake in innogy in an asset swap deal. The move has been well received by the market with positive noises made by analysts. Much has been made of how this deal signals the end of the era of vertical integration.

Nutwood

In our latest Nutwood, Ross Pert, Product Marketing Manager at GoCardless, writes on causes and curses in energy billing errors. Pert explains the remedy to billing errors is digital – something GoCardless provide to over 30 energy suppliers with its integrated Direct Debit software.

What is the Energy Spectrum service?

Our Energy Spectrum service comprises two publications designed to ensure you stay ahead of the game.

  • The Daily Bulletin – providing you with up-to-date information, collating the most important political, regulatory and industry developments from the previous 24 hours
  • Energy Spectrum – offers the latest news and expert comment and is seen as an essential source of analysis and insight on developments in the British energy markets

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