RIIO-2 Annual Iteration Process 2021 for Transmission, Gas Distribution and the Electricity System Operator
Reports, plans and updates
- Publication date
- Industry sector
- Transmission Network
- Distribution Network
- Licence type
- Electricity Transmission Licence
- Gas Transporter Licence
This page contains the results of the 2021 Annual Iteration Process (AIP) for the Electricity Transmission (ET), Electricity System Operator (ESO), Gas Transmission (GT) and Gas Distribution (GD) licensees under the RIIO-2, network price controls (ET2, ESO, GT2 and GD2 price controls).
The AIP updates Allowed Revenues across the ET2, GT2, GD2 and ESO price controls for the next regulatory year (2022/23).
Special Condition 8.2 in the ET, GT and GD licences, and Special Condition 5.1 in the ESO’s licence provides for the Gas and Electricity Markets Authority (‘the Authority’) to do the following by 30 November prior to each Regulatory Year:
(a) carry out the Annual Iteration Process for the ET2, GT2, GD2 and ESO Price Control Financial Model (as each of those terms are defined in Special Condition 1.1 of the special licence condition); and
(b) give licensees at least 14 days’ notice before it publishes the value of the following terms:
i. for ET and GD, Adjusted Revenue term (ADJRt) and the Allowed Revenue Term (ARt) in accordance with the calculation set out in Special Condition 2.1 (Revenue restriction),
ii. for GT, Adjusted Revenue term (ADJRt) and the Allowed Revenue Term (ARt) in accordance with the calculation set out in Special Condition 2.1 (Transportation owner revenue restriction),
iii. for GT, System Operator Adjusted Revenue term (SOADJRt) and the System Operator Allowed Revenue term (SOARt) in accordance with the calculation set out in Special Condition 2.3 (System operator revenue restriction), and
iv. for ESO, Adjusted Revenue term (ADJRt) and the SO Internal Allowed Revenue term (SOIARt) in accordance with the calculation set out in Special Condition 4.1 (System Operator Internal Revenue Restriction).
The Authority gave the ET, GT and ESO licensees notice of the value of ADJRt, ARt, SOADJRt, SOARt and SOIARt on 05 November 2021 and gave the GD licensees notice of the value of ADJRt and ARt on 08 November 2021.
The Authority received two representations from ET and ESO licensees in response to the notice regarding minor numerical errors within the Price Control Financial Model (PCFM) and labelling errors within the notice document itself, which have been corrected.
We received three representations from GD licensees, one which highlighted discrepancies between the licence and the PCFM and two representations regarding a number of license modifications that will need to be made to the special licence conditions to align them with the PCFM. We are aware of these issues and we intend to address them through a licence modification, which will take place in time for the subsequent AIP. Two of the four GD licensees also raised concerns around the implementation of the remedies required following the Competition and Markets Authority (CMA) RIIO-2 appeals, in particular the Business Plan Incentive values for Cadent and Northern Gas Networks. These values have now been corrected following further discussion with the two licensees in question.
We received two representations from GD licensees reflecting concerns around the level of uncertainty impacting certain variable values, namely those driven by wholesale gas prices and the cost of Supplier of Last Resort claims that are passed on to licensees. We have assured networks that if they become aware of any events which will have or are estimated to have a material effect on the value of ADJRt (or SOADJRt in the case of the Gas System Operator) that they may notify the Authority to request a re-publication of the PCFM in time for tariff setting. This will enable material shocks that take place between the date of this publication and the date of tariff-setting, to be reflected in Allowed Revenues.
One GD licensee raised several concerns around certain methodological and policy issues as well as future modifications required to the PCFM, which we will continue to maintain a dialogue on and may implement through a future consultation process, as appropriate.
The reason for and effect of this publication is to revise the PCFM Variable Values to re-calculate the values for the terms listed at paragraph 2(b) of this webpage.
The published values for ADJRt, ARt, SOADJRt, SOARt and SOIARt following the November 2021 AIP are shown within the ET2, GT2, GD2 and ESO Price Control Financial Models published on this page.
Real Price Effects model
The RIIO-2 Price Controls include an allowance for differences between the Price Index applied to Allowed Revenue and certain input price indices. We refer to these differences as Real Price Effects and these are reflected in the calculation of Allowed Revenue within the Price Control Financial Model through the term RPEt.
The model used to calculate the RPEt values that have been used for the 2021 Annual Iteration Process for the ET2, GT2, GD2 and ESO Price Control Financial Models, is published on this page.
WACC allowance model
The RIIO-2 Price Controls include an allowance for the licensee’s estimated Weighted Average Cost of Capital (WACC), which is calculated in accordance with the provisions of the ET2, GT2, GD2 and ESO Price Control Financial Handbook.
The model used to calculate the cost of debt and risk-free rate values that have been used for the 2021 Annual Iteration Process for the ET2, GT2, GD2 and ESO Price Control Financial Models, is published on this page.