The cables and wires that carry electricity have an essential role to play in powering our homes and businesses. Over the coming years electricity networks – both transmission and distribution – will provide the critical infrastructure to deliver net zero emissions across the whole country. This will be underpinned by the growth of renewables on the system.
As they are funded by consumers, the electricity networks are regulated by Ofgem through a framework known as a price control – limiting the total amount of money these companies can charge network customers over a set amount of time. The next wave of price controls will last 5 years and is set to start from April 2021 for electricity transmission and the electricity system operator. The timeline for electricity distribution companies is different, with the current price control period set to end in March 2023.
It is now more important than ever to bring forward the right tools so that network companies can support the transition to net zero. Over the next ten years, we will need to nearly triple the amount of wind we have online. Given the scale of the climate crisis, we will need significant upgrades of the current network infrastructure as we build greater flexibility across different voltages around the UK and connect more renewables - the delivery vehicle for tackling the climate issue. This is a challenge which has to be addressed by the regulatory network price control in order to ensure that the grid is able to keep at pace with the deployment of renewables.
Earlier in the summer Ofgem put forward a draft proposal for the package of reforms, outlining a couple of new mechanisms aimed at supporting net zero. However, those mechanisms, designed to minimise the risk to consumers from inefficient investment in network assets which would never be used, will not be enough to deliver net zero. In fact, the proposals risk delaying the grid investment which needs to happen in the next 5 years in order to support the growth of renewable generation on the system.
Firstly, we feel that the proposed package could delay decision-making by up to 30 months for large onshore projects greater than £100m in value. This is because the suggested project specific funding process for the construction phase of new large infrastructure projects, designed to address uncertainty of investment, would result in significant delay in grid upgrades if insufficient evidence is presented to Ofgem to justify infrastructure spending within the timeframes outlined. This would disrupt the connection of onshore and offshore renewable capacity. A much more flexible approach should be taken in order to enable network companies to apply to Ofgem for approval at any time during the 5-year period of the price control and avoid delays to connections to grid infrastructure less than £100m in value. The current proposal allows for a single, fixed application window in 2024. A more flexible approach would be to align the proposed timings for these uncertainty mechanisms with the Contracts for Difference timescales to speed up process and coordinate decision-making with key planning and consent stages.
Secondly, Ofgem's draft proposal caters for the additional level of funding needed for extra net zero investment, for example in areas such as offshore grid development. However, there is little detail on how this model would work in practice or build on wider work in this area which has been carried out recently. A long, onerous process could significantly delay investment in vital onshore grid infrastructure introducing further delays to the connection of new offshore renewable generation needed to stay on track for net zero.
I think the biggest challenge lies in the proposed design to the pre-construction spend of electricity transmission companies. This pre-construction spend aims to finance activities such as options assessment, stakeholder engagement and procurement processes. This is a fundamental requirement for the companies to provide the evidence and certainty that Ofgem will look for in order to approve spending on grid infrastructure projects. A design for pre-construction work which relies on regulatory review of justification for spending (ex-post funding) could slow down the process to obtain consents for new large grid infrastructure projects required for net zero while putting offshore deployment targets at significant risk whilst delaying wider offshore wind sector investment and supply chain opportunity. In this regard, it seems likely that any network investment based on mechanisms catered to deal with uncertainty would only be delivered towards the mid-2020s – the end of the next price control for electricity transmission.
Delivering a network fit for net zero goes beyond delivering new capacity. A large proportion of the spending cuts made to the networks’ business plans relate to the operation and maintenance of the network, such as inspection allowance or deferrals to critical asset replacement schemes. Relying on a ‘do the minimum’ approach as the baseline is inefficient and will result in higher costs to the consumer in the long term. In any case, refurbishments could mean that transmission works need to be carried out every few years to ensure reliability. Similarly, a greater focus should be placed on transmission companies optimising network outages practices and system availability to generation. Placing incentives on transmission companies could help to address these issues by reducing outage times thereby minimising generators’ operation and maintenance costs, system balancing costs, improving generator reliability and therefore security. Mechanisms which support better management of constraints should be baked in the regulatory package from the start.
In 2026 National Grid will mark a hundred years since its creation, which democratised the right to have access to electricity in every home and business. 2026 will also coincide with the end of the upcoming electricity transmission price control which has to drive the significant change on the system needed to achieve net zero by 2050. Ofgem will have to ensure that networks have the right tools in place to deliver the pace needed to decarbonise the economy by designing a framework fit for net zero which puts investor confidence and the needs of consumers in its core.