Ofgem publishes 2021 Annual Iteration Process for network price controls

Press release
Publication date

Ofgem has today published the results of the 2021 Annual Iteration Process (AIP) for energy network companies under its network price controls.

As part of the ‘Revenue = Incentives + Innovation + Outputs’ (RIIO) price controls for network companies, we make annual adjustments to the revenue that we allow the energy network companies to collect through the AIP.

The AIP updates allowed revenues for the next regulatory year (April 2022 - March 2023) across Ofgem’s five RIIO price controls. (‘2’ refers to RIIO-2, the new price control which began in April this year and applies to all network companies except for electricity distribution network companies for whom it applies from April 2023.)

  • Gas Distribution (GD2)
  • Electricity Transmission (ET2)
  • Gas Transmission (GT2)
  • Electricity System Operator (ESO)
  • Electricity Distribution (ED1)

For the RIIO-2 network companies, this is the first AIP of the RIIO-2 period and includes forecast inputs, which can be revised once actual inputs are known. This AIP also includes the remedies required following the Competition and Markets Authority (CMA) RIIO-2 Licence modification appeals. All figures are in nominal terms.

RIIO-2

For GD2 and ET2, GT2 and ESO this year’s AIP has increased the allowed revenue that companies will collect relative to the assumptions made at the start of the price control by £1.36 billion, £24 million, £270 million and £85 million for GD2, ET2, GT2 and the ESO, respectively. This is driven by: 

  • Inflation – higher actual and forecast inflation rates resulting in higher allowed revenue.
  • Return on Equity (ROE) – we have removed the “outperformance wedge” from the ROE calculation following the CMA’s final determination.
  • Allowed expenditure - networks are generally forecasting more expenditure than the amounts assumed at the start of the price controls.
  • Western High Voltage Direct Current (HVDC) - the Western HVDC redress payment announced this morning has significantly reduced allowed revenue for ET2.
  • Gas prices – in GT2 and GD2, forecast gas prices have increased significantly over recent months, which results in an increase in costs and therefore revenues.
  • Supplier of Last Resort (SoLR) –in GD2, allowed revenue includes a preliminary estimate of SoLR costs, which results in greater allowed revenue.

ED1

For ED1, this year’s AIP has reduced the base revenue that companies will collect relative to the assumptions made at the start of the ED1 price control by £474 million. This is driven by:

  • Cost of Debt – interest rates are now lower than assumed at the start of the price control.
  • Allowed expenditure – ED1 companies have spent less than the amounts assumed at the start of the price control.
  • Tax relief –the tax super deduction and special rate allowance announced by the government earlier this year resulted in a further reduction to base revenues.

We have published updated Price Control Financial Models (PCFMs) for the five price controls:

RIIO-2 Annual Iteration Process 2021 for Transmission, Gas Distribution and the Electricity System Operator

RIIO-ED1 Annual Iteration Process 2021

For media, contact

Antony Quarrell

antony.quarrell@ofgem.gov.uk                                 

0207 901 7320

Or

press@ofgem.gov.uk