Energy regulator Ofgem is to overhaul its regime in a bid to kick-start innovation in low carbon technology.
Ofgem estimates that £200bn is needed over the next decade to deliver secure sustainable energy supplies. However, the regulator says the cost of delivering all of the £200bn could see energy bills rise by between 14% and 25% by 2020.
And its new regulatory blueprint comes in the wake of the Department of Energy and Climate Change hacking £34m off its budget for low carbon technology.
Ofgem says that Britain’s energy networks need to undergo a revolution if they are to meet the challenges of a low carbon economy. Networks will have to be smarter to balance more intermittent renewable generation sources while at the same time managing increased demand for electricity through the electrification of transport and heat.
Ofgem says it wants to ensure companies have the right incentives to make the significant investment and innovation needed to make a low carbon economy possible and also deliver better services for customers.
Ofgem is launching a regulatory overhaul under the banner RIIO (Revenue=Incentives+Innovation+Outputs), which it claims will “protect consumers by rewarding those companies that innovate and invest efficiently, but punish those which perform badly for consumers with lower returns on their investment”.
Ofgem’s chief executive Alistair Buchanan said: “If Britain’s energy networks are going to meet the challenge of delivering a low carbon economy then we need them to have innovation in their DNA. To bring about this change Ofgem is seeking to make regulation “smarter” by placing more emphasis on financial incentives to deliver efficient innovation and investment over a longer timescale.
The key features of the new regulation include fast track price controls for companies that innovate and deliver good service; more intrusive regulation for poorly performing companies; increasing price controls from five to eight years, to provide greater stability; and an expansion of Ofgem’s own low carbon networks fund to encourage greater innovation across gas and electricity networks.