RIIO-2 Energy Network Price Controls—the evolving position
RIIO-2 Energy Network Price Controls—the evolving position

The following Energy guidance note provides comprehensive and up to date legal information covering:

  • RIIO-2 Energy Network Price Controls—the evolving position
  • Introduction and background
  • Periods for RIIO-2
  • A short word on the ESO
  • Outputs and incentives for RIIO-2
  • Dealing with uncertain costs
  • Competition and innovation in networks
  • Financing costs (cost of debt and cost of equity)
  • Financeability

Introduction and background

This Practice Note summarises the position on the ‘RIIO-2’ Great Britain energy network company price controls due to apply from 2021.

RIIO (Revenues = Incentives + Innovation + Outputs) refers to the methodology through which the Office of Gas and Electricity Markets (Ofgem) determines the prices that Great Britain’s (GB’s) licensed onshore energy network owners and operators can charge for the use of the electricity and gas transmission networks.

These charges are, in the first instance, paid to network companies by licensed suppliers and generators/gas shippers (under the Connection and Use of System Code, the Distribution Connection and Use of System Agreement, and the Uniform Network Code). However, they are ultimately recovered from customers as part of energy supply bills and indeed make up a significant portion of the cost of receiving energy. As a result, ensuring tight and appropriate controls on the levels of charges so as to avoid inappropriate levels of return for network companies, is a political and regulatory imperative.

This note focuses on the next set of RIIO price controls (known as RIIO-2 or RIIO 2) which will begin to apply from 31 March 2021. This Practice Note is updated as the position evolves.

For an introduction to the legal basis of energy network company price control in Great Britain, see Practice Note: The regulation of charging (‘price control’) by Great Britain’s electricity and gas network companies.

Ofgem first developed the RIIO approach in 2010. It was implemented by making amendments to electricity and gas network companies’ licences pursuant to Ofgem’s right to do so under section 11A of the Electricity Act 1989 and section 23 of