Transcript Document
Welcome RIIO - What does success look like? Delivering Network Outputs in a more visible world Network 2015 Anna Rossington 19/02/15 Agenda • RIIO objectives • Reviews • Implementation 4 What is RIIO designed to achieve? Support the delivery of a sustainable energy sector Innovation De-carbonisation Security of Supply Ageing Assets Affordability Optionality & flexibility • • • • • • • • • • Renewables / new generation Smart Grids • Biomethane Electricity storage • HVDC Electric vehicles • Skills shortages Different network patterns Electrification of heat Energy efficiency Local generation Working with Demand Side Management Carbon Capture and Storage others to identify best delivery solutions While delivering long-term value for money network services for existing and future consumers Reviews DPCR5 process Policy & cost assessment RIIO-T1 policy development fast-track assessment slow-track assessment licence fast-track assessment slow-track assessment licence RIIO-GD1 policy development 2010 2011 2012 2013 2014 RIIO-ED1 policy development fast-track assessment slow-track assessment licence Transmission ‘Gone green’ scenarios innovation strategies stakeholder feedback long term benefits (ie 45 year CBAs) potential major network upgrades/connections Gas distribution Future of gas, and unconventional sources innovation strategies stakeholder feedback long term benefits (ie 45 year CBAs) HSE requirements Electricity distribution Companies’ business plans considered: DECC low carbon scenarios SGF, transform model, LCN Fund learning innovation strategies stakeholder feedback long term benefits (ie 45 year CBAs) Content & quality varied Weak on long term strategies and broader industry awareness 7 Business plans Stakeholder engagement Process Price control review process Clarity up-front about process and timescales Majority of policy developed up-front – clarity for companies to develop their plans Clarity on expectations from companies and stakeholders Potential to be fast-tracked significantly increased quality of submissions Two-stage assessment drove further improvements in plans Significantly more engagement than in previous price control processes ? education / understanding Companies increased stakeholder bases/engagement strategies & needed to processes participate in detail Significantly more information and explanation of companies’ plans Significantly more detail published – greater level of transparency Needs to be a Evidence of how stakeholders have informed those plans living, business Evidence of longer-term thinking document Consideration of innovation in developing the plans Fundamentally changed behaviour and Board discussions at companies Implementation 9 Stakeholders/customers SUCCESS DEPENDS ON Get outputs/service they want, at efficient cost Ex ante allowances, output targets and incentives Understand what company is doing / facing Monitoring, reporting, information sharing Appropriate apportionment / valuation of risk Regulatory & institutional transparency Influence over what company does Ongoing stakeholder engagement / reputation 10 Environment Transmission Compliance with HSE asset health measures losses BCF visual amenity SF6 EDR Energy Not Supplied Minimum standards Network Access Policy Legal obligations Compliance with HSE risk reduction asset health measures EEI BCF Broad Environmental Objective Minimise supply interruptions 1 in 20 supply capacity obligation Compliance with HSE asset health measures losses BCF visual amenity SF6, FFC Environmental report IIS GSOPs Secondary deliverables Electricity distribution Safety Gas distribution Outputs/service at efficient cost Reliability availability Connections legal requirements plus timely connection GSOPs Voluntary stds for distributed gas TTC (small) ICE (large) GSOPs Customer service Social Stakeholder satisfaction Broad measure of customer satisfaction Fuel poor network extensions Discretionary reward Broad measure of customer service Stakeholder engagement incentive 11 Outputs/service at efficient cost outputs Network output measures / network asset indices Efficiency incentive Innovation stimulus package Smart grids benefits 12 Understanding what company is doing Performance reporting • Companies publishing annual status across price control elements to stakeholders • Ofgem provides centralised summary/overview/comparison • RIIO-ED1 – companies have to report on business plan commitments RIIO accounts • Companies publish financial statements which reflect annual iteration, incentives, carried-forward over/under recoveries, fair value adjustments • Statements of financial position, performance, governance 13 Influence over what company does Direct: • Stakeholder engagement assessed annually • Several incentives (ICE, visual amenity) require direct stakeholder input • Strategy updates (eg innovation, losses) require stakeholder engagement Reputation: • Public comparison with other network companies • Public comparison with other industries 14 Companies 14% Return on Regulatory Equity (real, post-tax) 12% 10% 8% 6% RIIO-ED1 potential returns Tax trigger deadbands Time to connect & incentive on connections engagement Losses discretionary reward Guaranteed standards for connections Guaranteed standards for severe weather Guaranteed standards for reliability Broad measure of customer service (BMCS) Health index (HI) 4% Interruptions incentive scheme (IIS) Totex efficiency incentive 2% Ex ante reward/penalty RPI formula effect 0% Baseline RoRE • High performing company could earn double digit return • This means: • • delivered additional outputs achieved efficiency savings (shared with customers) • A company which under-delivers could earn less than cost of debt. Potential to outperform allowance – IF deliver outputs and efficiency 15 RIIO-T1/GD1 year 1 results Do company outperformances mean RIIO not working? • • • • No - companies are incentivised to outperform – to deliver benefits for customers Can’t draw conclusions from one year – plus legacy from previous controls Expenditure savings shared with consumers Companies have to achieve their network secondary deliverable commitments Ofgem RIIO-T1 & GD1 annual reports (published shortly) will provide more detail 16 Conclusion • Positive feedback from those involved in reviews • Global reputation • Process – significant improvement over previous price controls – but still room to improve (lessons learned) • Implementation – components in place – now for the outputs RIIO-1 RIIO-2 • • • • • • • • • • Renewables / new generation Smart Grids • Biomethane Electricity storage • HVDC Electric vehicles • Skills shortages Different network patterns Electrification of heat Energy efficiency Local generation Demand Side Management Carbon Capture and Storage long-term value for money network services for existing and future consumers 17 What’s good and not so good about RIIO: Andy Manning Date: February 19th 2015 © British Gas Introduction • Why does British Gas get involved in Network Regulation? • RIIO in principle • Historical evidence • RIIO in practice • Conclusion © British Gas Slide 20 Why does British Gas get involved in network regulation? © British Gas Slide 21 RIIO in principle is good “...we regard an appropriately calibrated price control package as one in which RoRE upside (ie the reward available for the best-performing DNOs) provides the potential for double-digit returns on (notional) equity, and RoRE downside (ie the penalties that would apply to the worstperforming DNOs) is at or below the cost of debt...”, Ofgem (2012), ‘Consultation on strategy for the next electricity distribution price controls - RIIO-ED1 - Financial issues’, para. 3.13. See: https://www.ofgem.gov.uk/ofgem-publications/47149/riioed1sconfinancialissues.pdf Ofgem (2013), ‘RIIO-ED1: Draft Determination for Western Power Distribution Ltd’, page 27. See: https://www.ofgem.gov.uk/ofgempublications/84602/draftdeterminationsmaster.pdf © British Gas Slide 22 Historical evidence is less clear cut Allowed Control Return Years on Equity Price control DPCR4 2005-10 7.50% DPCR5* 2010-15 6.70% GDPCR1 2008-13 7.25% TPCR4 2007-12 7.00% *First 2 years © British Gas Slide 23 Average actual Return on Equity (and range) Companies at or above allowed Return on Equity Companies below allowed Return of Equity 8.4% (5.5%-10%) 11.2% (6.8%-14.4%) 9.5% (8.2%-11.2%) 9.1% (7.4%-10.1%) 12 2 14 0 8 0 4 0 RIIO is practice is complicated © British Gas Slide 24 Conclusion • RIIO principles good: • Rewarding high performing networks • Delivering outputs that are important to customers • Further evidence required to demonstrate value for money • More clarity about expected results and justification • Critical assessment of historical performance • Stakeholders can have a role in providing this assurance • Stakeholders play a much enhanced role in the price control process • However, little engagement in the detailed design • More active engagement on the details (incentive schemes) may prove beneficial © British Gas Slide 25 Delivering Network Outputs Implementation Mark Drye Director of Asset Management Northern Powergrid RIIO-ED1: The Outputs Challenge Network 2015 Mike Kay 19 February 2015 27 Introducing Electricity North West 4.9 million 2.4 million 25 terawatt hours £12 billion of network assets 56 000 km of network l 96 bulk supply substations 363 primary substations l 33 000 transformers 28 Introducing RIIO-ED1 What is RIIO? Purpose Model Benefits Revenue = Incentives + Innovation + Outputs Designed to drive real benefits for consumers £ Ofgem’s new electricity distribution price control framework for network regulation Sets the outputs and revenues for GB’s 14 DNOs for the eight-year period from 1 April 2015 to 31 March 2023 Strong incentives to deliver low carbon, sustainable energy sector at value for money for consumers 29 Increasingly complex price controls… DPCR1 DPCR2 DPCR3 DPCR4 DPCR5 RIIO-ED1 1990-95 1995-2000 2000-05 2005-10 2010-15 2015-23 Five year review period Fixed income Eight year period Uncertainty mechanisms Quality of Supply Incentives Broad Measure of Customer Telephone response measures Satisfaction Losses incentive Losses reporting Innovation Funding Incentive Network Innovation Low Carbon Allowance and Network Fund Competition Balancing of opex and capex incentives Incentives for workforce renewal Health indices and load Indices Fully fledged risk based health indices Cost benefit analysis Outputs Fast track 30 RIIO-ED1 challenges Greater use of Incentives to drive behaviour Increased political influence on priorities and actions Continued focus on Innovation and delivery of demonstrable benefits Need to up the sector’s game in terms of customer service Greater need to tie investments and activities to demonstrable Outputs £ Greater uncertainty - new approaches to deal with optionality & uncertainty ? Need to prepare for, and start investing in, a low carbon future – scale remains uncertain Need to demonstrate much greater understanding of the asset base 31 RIIO framework more aligned with asset management Asset management aims DPCR RIIO-ED1 Whole life consideration Short-term Different efficiency models encourage long term evaluation Evaluation of different intervention options Silo assessment – cherry picking Different efficiency models encourage evaluation of different options Cost benefit analysis – cheapest is not always best Lowest cost CBA models introduced Customers are important Activity is key Output metrics more important Balanced incentives for costs Underspending is and outcomes rewarded New incentives encourage best value 32 Puts checks and balances into process Onus on DNOs to demonstrate that any changes justified Company makes case at price control Allowances generated through DPCR process Asset or performance deteriorates Competing routes to contract outperformance incl re-investment Detailed assessment including analysis of past performance Company makes efficiencies by de-scoping Associated targets, incentives and sanctions for non-delivery 33 Outputs are critical to the contract Outputs are the products and services we will deliver for customers and stakeholders ! Safety Reliability and availability Social obligations 40 specific outputs Customer satisfaction Connections Environmental impact Everything we do on our network will be linked to an output measure 34 Outputs Outputs cover the range of our service offering 35 Output challenges Outputs Variable incentive properties Service-led Worst-served customers, time-to-connect Directly incentivised IIS Compliance-led Safe climbing, overhead clearances Indirectly incentivised Losses Resilience-led Black Start, flood protection £ Reputational incentives Many of the output metrics have been trialled and developed through DPCR5 Significant future work on harmonisation of assessing health, condition and risk 36 Health, condition and risk ! Risk = probability of failure x consequences of failure Consequences of failure = criticality factor x average consequences Risk indices – new output for RIIO-ED1 Needs a scale for probabilities of failure, linked to discoverable and recordable condition metrics Builds on health indices deployed for DPCR5 Also needs a common, quantified framework for considering the consequences of asset failure Gives an indication of network risk by including criticality Probability of failure varies from regular to extremely rare Ofgem intend to use it as a metric for delivery Impacts of failure vary from inconsequential to disastrous 37 Risk indices including criticality Process generates risk matrices by asset type . . . . . . which can be added together to form a view of total risk End of DPCR5 (31 March 2015) with investment HI 1 HI 2 HI 3 HI 4 Network risk without intervention 16,000,000 14,000,000 HI 5 12,000,000 392 1073 577 295 914 3,251 C2 1106 3031 1630 831 2582 9,180 C3 429 1175 632 323 1001 3,560 10,000,000 Risk C1 8,000,000 6,000,000 4,000,000 C4 94 257 139 71 220 2,021 5,536 2,978 1,520 4,717 781 2,000,000 2015 start 2019 without 2023 without 38 Risk indices including criticality Broadly common overall process for criticality assessments for ED1 Criticality index Consequence categories Requires harmonisation of approaches to health, risk and criticality assessments Consequence factors Asset specific parameters BUT still significant variation of interpretation and no standardisation for Health assessment Licence condition on DNOs to submit a common asset indices methodology by Jul 15 Some fundamental questions to answer, eg ‘what is failure?’ 39 Our innovation strategy Offer new services and choice for the future ‘Fit and forget’ Generate value for customers now Maximise use of existing assets Delivering value to customers Proven technology deployable today Innovative solutions to real problems 40 Our smart grid development Leading work on developing smart solutions Deliver value from existing assets Customer choice Four flagship products (second tier) £36 million Capacity to Customers 41 Our LCN Fund projects Technical innovation Combines proven technology and new commercial contracts to release network capacity Seeks to demonstrate that electricity demand can be managed by controlling voltage…without any discernible impacts on customers Combines innovative technology with existing assets to make networks and appliances perform more efficiently The first UK demonstration of an active fault level management solution that avoids traditional network reinforcement New commercial contracts Lower network costs Faster connections Lower balancing costs Reduced carbon Lower energy costs New controllable switching devices stabilise voltage Allows us to lower voltage levels Enables networks and appliances to work in harmony £ Faster LCT adoption Less disruption Lower bills 42 Summary Innovation in RIIO is key for Electricity North West Development of asset management as a holistic view Recognising the challenges of the future and customer choice Techniques to efficiently refresh the current asset base Innovation to minimise the need for investment 43