As COVID-19 continues its grip, we face huge uncertainty on how the future looks and what demands there will be on electricity networks. Businesses have adapted, and working from home will likely be more common as part of the new norm going forward, but the drive toward net zero will place different demands on electricity networks. There have been unexpected effects from the disruption, such as a 73% reduction in vehicular traffic in the United Kingdom and subsequent decreases in air pollution. We also potentially face difficult global financial impacts from the ongoing pandemic. How could all this affect the RIIO-2 price controls framework?
The Current Situation
In its latest open letter to U.K. network operators, the Office of Gas and Electricity Markets (Ofgem) praised network companies for “the impressive performance they have delivered” during what Ofgem hopes will prove to be the most challenging period of the pandemic. As government restrictions are eased, Ofgem has stated it expects the networks to comply with all regulatory obligations whilst keeping their supply chain, their customers and their staffs safe. Ofgem’s CEO, Jonathan Brealey, also suggested in a Sunday Times article that the network companies need to play their part in the post-COVID-19 recovery, considering their social contract with customers, many of whom will feel the effects of the impending recession.
Even with the electric utility companies changing their working ways to deliver essential services, there may be a silver lining. Although most utilities will face an overall reduction in profit this year, interest rates have been reduced significantly. Some utilities may find it prudent to borrow more and invest in renewables and smart grid systems to meet the net-zero target by 2050. For example, SSE has unveiled a plan to spend more than £7 billion on major low-carbon infrastructure projects over the next five years in both onshore and offshore wind projects, grid upgrades and other low-carbon initiatives. SSE has also made a commitment to reduce carbon emissions by 60% by 2030.
Whilst the government has set out its plan for injecting £250 billion ($285 billion) to fund infrastructure projects (Project Speed), the power industry can provide a stimulus for economic recovery from the fallout of COVID-19 through investment in renewables and bringing to reality smart grid projects such as E-PORT Smart Energy Master Plan. It is important that the RIIO-2 model builds in flexibility to respond to these changes, both for increased investment in transmission systems and for adapting to greater electrification. RIIO-2 must also incentivise network companies further to reduce carbon emissions and facilitate the regulatory changes required to transition to net-zero emissions by 2050.
No one knows what the future holds or how this will impact the regulatory model. If working from home becomes the new norm for many companies, there will be corresponding reductions in demand from these office-based facilities. People may be less governed by routines and strict adherence to times for commuting or the school run. The typical morning demand peak could flatten, and as we transition to an EV future, the reduction in travel could also mean that EVs are charged less frequently, further reducing strain on the grid. Thus, networks may be able to plan more effectively and potentially reduce the amount of network reinforcement required by utilising existing electrical assets to their potential.
However, industry will still require power, and the drive toward net zero would increase electricity demand in certain sectors. Further, the desire for more offshore wind would require investment in transmission systems to bring the power to where it will be needed. How will this affect funding for RIIO-2 for the electricity network companies? The need to innovate and invest in the networks will be even more important, and the need for supply chain capacity to deliver future programmes of work will be critical.
Regulatory funding is based on predictable financial trends. If this current uncertainty continues around the global markets, cost-of-capital forecasts may no longer be as accurate. This will result in greater uncertainty when modeling a five-year regulatory period. The volatility and uncertainty in the markets may also represent an added risk to investors, potentially stunting the investment growth in renewable and smart grid projects. However, with historically low interest rates in the U.K., it is a rare opportunity to invest in sustainable technologies and power systems to reduce carbon emissions whilst providing a stimulus to the economy.
As we see further movement toward a more sustainable economy, we will need to see investment in training and development of essential skills needed for the power generation supply chain to deliver the required programmes of work. We must not forget the lessons learned from the current pandemic in investing in critical infrastructure and services to permit continued operations as we continue to navigate.
COVID-19 has highlighted, for example, the importance of having a robust supply chain in place. Although there are likely to be tough times ahead, investing in electrical infrastructure is more critical than ever. This will help with economic recovery as well as furthering steps towards a green economy.
COVID-19 has tested all of us in many ways — and perhaps changed our thinking. This is the perfect opportunity for the government in general and Ofgem in particular to help provide a flexible legislative and regulatory framework that would deliver the resources needed to continue safe, efficient, secure and reliable utility operations.
The U.K. power market faces a variety of factors creating uncertainty in the industry. Learn how Ofgem’s proposed cap on capital costs under RIIO-T2 price controls could affect the market.