Ofgem decision adds to fears that grid will not be ready for net zero
Image credit: Low-voltage pylon. Photograph: Filip Albert | Dreamstime.com
The energy regulator Ofgem has allocated distribution network operators (DNOs) around £500m less than they originally said was needed for network reinforcement, leading to fresh concerns that the electricity grid will not be prepared for net zero.
Ofgem published its final determinations for DNOs last week. The regulator allowed the networks a total of £22.2bn investment between 2023 and 2028, claiming this amount would allow for the scale of investment required without adding to customers’ bills.
However, the DNOs had initially asked for £3.16bn of ‘load-related expenditure’ – the portion of investment that covers network reinforcement. Experts say reinforcing the UK’s ageing electricity network will be vital with millions of electric vehicles and heat pumps due to be rolled out in the coming years.
Ofgem had proposed allowing DNOs £2.83bn of load-related expenditure in their draft determination this summer, but the regulator’s final decision was £2.62bn. This decision came just months after an analysis from E&T revealed a potentially huge investment gap that threatened the UK’s net-zero ambitions, with electricity demand set to increase by more than 70 per cent by 2050.
Ofgem says it has plans in place to enable networks to invest more if needed but there are fears that supply chains will not be ready.
The trade association for energy infrastructure companies, BEAMA, said it was concerned that “the capacity of the supply chain and the impact of current and future supply chain disruption is still not recognised as being a possible threat to network resilience and the ability of the country to meet net-zero targets”.
Ofgem says its package of ‘uncertainty mechanisms’ it has provided to DNOs gives them flexibility to request additional immediate investments as demand materialises.
It said the design of these mechanisms had avoided placing unnecessary costs on consumers at a time of economic uncertainty, while also “ensuring that the DNOs can invest in their networks as demand materialises to ensure that our networks enable net zero at lowest cost".
However, John Parsons, BEAMA’s digital and technology manager, said his organisation considers that the uncertainty mechanisms, “in effect, transfer the risk for stranded investment away from the consumer but onto the supply chain who must decide whether to invest in new plant and training based on a poor understanding of future demands”.
Merlin Hyman, chief executive of Regen, a think tank with the mission of helping the UK achieve a net-zero energy system, said allowing DNOs to make the £500m investment would “only have added a pound or two” to consumer bills.
Writing on LinkedIn, he said this was “a small fraction of the hundreds of pounds that more low-cost renewables and electric vehicles could save us”.
In response to the final determinations, David Smith, chief executive of the Energy Networks Association, which represents the UK’s energy network operators said: “The importance of the next price control for distribution networks cannot be overstated. It sets out how the companies will increase investments year on year to unlock decarbonisation, deliver growth and create longer-term customer benefits, all whilst keeping our part of the energy bills low.”
Ofgem said it would publish a statutory consultation on the licence modifications this month. The DNOs have until February next year to appeal the price controls.
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