Ofgem to ‘turn your street green’, with proposals to transform Britain’s local electricity networks for a cleaner, fairer energy system

Ofgem has today set out its proposals to rewire Britain at a local level to deliver a greener and fairer energy system for British consumers. (1)

Electricity distribution networks, which transport electricity locally to Britain’s homes and businesses, have a crucial role in eliminating harmful carbon emissions from GB’s energy sector in line with Government targets. (2) As Britain moves to greener forms of heating and transport, and more households and businesses produce their own local clean energy (3), local networks will have to expand their role and capacity to manage new sources of demand and an increase in electricity flowing through the grid.(4)

Ofgem is now consulting on the methodology for the next price control for the local electricity networks, which runs for five years from 2023. This follows proposals earlier this month on the price controls for the gas and electricity transmission and gas distribution operators which run from 2021.

Unlocking green investment

Ofgem’s proposals aim to unlock the investment needed to ensure the local electricity networks can drive forward green energy and transport for GB. This will help deliver the capacity and charging infrastructure needed to support a projected 11 million extra electric vehicles on our roads by 2030, as well as the infrastructure needed to deliver clean heat to GB’s homes and businesses and help connect the increase in renewable energy being produced locally.

This includes proposals to help companies speedily and reliably upgrade the network in anticipation of forecasted increases in local demand for electricity.(5)

This also includes a new strategic innovation fund across all energy networks, worth an initial £450 million, to help drive more research and development into green energy.

A system wide ‘net zero’ fund - proposed in our recently published draft determinations for the transmission and gas distribution sectors - will unlock significant, potentially unlimited, additional funding to drive good value green infrastructure upgrades. Companies can access funding over the course of the price control as needed – provided they can make a robust business case. This could fund for instance co-ordinated upgrades to the transmission and distribution power grids to enable a nation-wide charging network for electric vehicles.

Managing energy flows

Ofgem is proposing measures to make sure that network operators can efficiently manage the electricity flowing through their grids, as increasing generation from local renewable sources requires them to take on greater system operation responsibilities.

This includes requiring companies to grow their capacity using ‘flexible’ solutions where they can, such as battery storage or smoothing peaks in demand, rather than building expensive new network capacity.

It also includes increasing coordination and planning across the energy system, digitalisation of the energy system, and making better use of electricity network companies’ data – including sharing this with flexibility providers.

Flexible solutions can be less expensive for consumers and delivered quicker. According to Ofgem analysis if owners of electric vehicles use ‘flexible’ charging - where they only top up outside peak demand times on the grid – at least 60% more electric vehicles could be charged up using existing capacity compared with vehicles charged only at peak time.

Cutting costs to consumers

In common with Ofgem’s approach to the wider RIIO-2 price controls, we expect to see lower returns for investors in ED-2. This means less of consumers’ money goes towards network companies’ profits, and more towards improving the network and fighting climate change. (6)

This package of measures will help keep the costs of delivering a green emissions-free economy for Britain as low as possible for consumers.

Ofgem’s CEO Jonathan Brearley comments:

“Our proposals will help turn Britain’s streets green, putting in place the wires and technology for families to travel in electric vehicles and heat their homes and businesses with clean energy.

“The green energy transformation is not just about putting more copper in the ground. We need a modern, digital grid that uses all our energy assets as efficiently as possible”

“Local electricity networks will be at the forefront of eliminating harmful carbon emissions from the country, helping tackle climate change, so it’s vital they have the investment they need to do this whilst keeping costs as low as possible for consumers.”

Notes to editors

More details on our RIIO-ED2 Sector Specific Methodology Consultation

(1) Ofgem’s five-year price controls set the framework and the revenue that each of GB’s 14 Distribution Network Operators (DNOs) can earn from charges on consumers’ energy bills. The average GB customer currently pays around £90 per year to meet the costs of operating, maintaining and reinforcing these local grids.

(2) Last year the UK Government legislated to cut the UK’s carbon emissions down to ‘net zero’ by 2050. Welsh and Scottish Governments also have made net zero commitments.

(3) To achieve ‘net zero’: 11 million more electric vehicles by 2030 (National Grid Future Energy Scenarios); by 2035 all replacement heating systems should be low carbon or ready for hydrogen; over 8m hybrid heat pumps are projected to be adopted, responding to market signals and shifting demand between hydrogen and electricity systems by 2050 (National Grid Future Energy Scenarios 2020); the electrification of sectors such as transport and heating could result in a doubling of electricity demand by 2050, with all power produced by low-carbon sources (Committee for Climate Change 2020)

(4) Currently 34% of GB’s electricity comes from renewable sources (Committee for Climate Change 2020); since 2015, 10GW of distributed electricity generation from small scale generators has connected to the grid. DNOs have been taking on roles and responsibilities more traditionally associated with the system operator, such as liaising with local storage providers, to manage the increase in energy from diverse sources coming onto the grid.

(5) We are consulting on four different models to enable strategic green investment to drive forward ‘net zero’ carbon emissions by local network companies. These explore whether a centralised or decentralised approach to planning is best and whether there is sufficient certainty to provide funding at the outset of the price control or to link it to uncertainty mechanisms that will provide funding over the course of the price control as needed. These models are not mutually exclusive and could be deployed in parallel to address different types of strategic investment requirements.

(6) When calculating the allowed return on equity for electricity distribution companies, Ofgem will apply the same methodology it has set out for gas/electricity transmission and gas distribution price controls.

When applied to the transmission and gas distribution sector, this resulted in allowed return on equity of 3.95% - approximately half that of the current price control. However, this calculation cannot be accurately forecast for the electricity distribution price control as the allowed return includes, for example, market-based indexation which will occur over the next two years to 2023 when this price control starts.