Ofgem kickstarts conversation on future energy price controls funding to pave the way for net zero

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A major consultation to decide the 2026-2031 electricity transmission and gas network price controls has been launched by Ofgem today (Wednesday 13 December) - covering a critical five-year period on the transition to net zero. 

It is a key step in agreeing the proposed RIIO-3 price control methodology to invest in the energy system into the next decade.  

It is designed to balance protecting existing and future domestic consumers, while unlocking the long-term capital needed in national electricity and gas transmission infrastructure and local gas distribution grids across England, Wales and Scotland. 

RIIO-3 will kick in once the current settlement for high voltage electricity transmission and national and local gas networks ends in 2026. 

It builds on major steps this autumn to drive forward the biggest transformation of the electricity grid since the war: strategic system planning through the new independent Future System Operator; accelerating investment in new transmission lines; and connecting cleaner, cheaper power to the grid as quickly as possible. 

Today’s consultation also considers the future regulation of the gas grids against a range of uncertainties, with the government still to decide on the future use of hydrogen and carbon capture in the energy system.  

The proposal asks for feedback on how best to accommodate policy challenges in gas policy; investing in safe, secure, and resilient supplies; and protecting consumers and investors from the costs of downgrading and eventually decommissioning the national gas network.  

The detailed consultation is based on four main principles establishing: 

  • infrastructure fit for a low-cost transition to net zero: network companies must invest in a low-cost, environmentally sustainable, low carbon energy system that enables the transition to net zero, with infrastructure built at pace.  
  • secure and resilient supplies: network companies must deliver a safe, secure, and resilient network that is efficient, data rich and responsive to change. Consumers should have access to gas and electricity supplies that are resilient to physical, financial, climate change and cyber-attacks. 
  • high quality of service from regulated firms: network companies must deliver a high quality and reliable service to all consumers and network users in the net zero transition, including those who are in vulnerable situation. 
  • system efficiency and long-term value for money: network companies must deliver an efficient cost of service, minimise the costs to consumers of system transformation and ensure consumers and network users get a fair deal. 

Steven McMahon, Ofgem’s Interim Director for Network Price Controls said:  

“2026-2031 is a critical five-year period in hitting the targets for a clean power system by 2035 and net zero overall by 2050.  

“Our job is to ensure our network regulation can inject the significant investment needed to deliver cleaner, cheaper and more secure energy. It needs to improve resilience to climate and cyber risks, maintain high standards of network services, while keeping the overall costs of the transition to net zero low for consumers through their bills. 

“We’re driving forward the biggest transformation of the electricity grid in decades, working with government, investors, and industry. We’re knocking down all the barriers with a new approach in planning the system, targeting investment where we need it, when we need it, so we can expand the network more strategically to better anticipate future demands and connecting new power onto the grid as quickly as possible. 

“We’re honest about the uncertainties on the future of the gas network. It’s right that government takes the time needed to weigh up big strategic policy calls on the future of the gas grid – but time is of the essence as the status quo is not sustainable. We must nail down in the next 18 months how we regulate network assets amidst these strategic uncertainties, particularly around potential repurposing or decommissioning the grid, while protecting the interests of consumers and investors both now and in the future.  

“This consultation is a critical step in determining how we redesign our network regulation to address a net zero future and we’re calling on stakeholders across the energy industry, investors, businesses and consumer groups to feed into this process.” 

Centralised Strategic Network Plan 

Ofgem has also today set out how the Future System Operator will implement the new Centralised Strategic Network Plan (CSNP) from 2026 which be critical to targeting investment under RIIO-3. 

This will be an independent, coordinated, and longer-term plan to build onshore, offshore and cross-broader transmission electricity networks required to decarbonise the power system – as well as the future gas transmission network. 

The CSNP will lay down a firm plan for the transmission network development for the first 12 years to ‘lock in’ investments and a longer-term 25-year outlook to achieve net zero by 2050, including assessing options to reduce long-term costs for consumers. 

The RIIO-3 consultation opens today (Wednesday 13 December) and closes on Wednesday 6 March 2024.  

Ofgem anticipates confirming the methodology decisions for these price controls in Q2 2024, which will inform the company spending plans submitted by the end of 2024. Ofgem will them make its determinations on funding for the transmission and gas distribution sectors in 2025, with the price control period due to start on 1 April 2026.