ESO response to Ofgem’s consultation on the ESO’s funding model in RIIO-2

In May 2019, Ofgem published its Sector Specific Methodology decision document outlining some key decisions it had made in regards to the ESO’s RIIO-2 framework. As part of this Ofgem decided to further consult on the ESO’s funding model. The chosen funding model should underpin and drive the delivery of consumer benefits from the ESO’s roles and activities. 

In its consultation Ofgem sought stakeholder views on:

  • Two potential funding models:

Remunerate the ESO with a Regulated Asset Value (RAV) based model for capital expenditure (e.g. for IT) that provides money over the lifetime of the assets; and provide money upfront for operational expenditure (e.g. for people), passing through the actual operational costs incurred straight to consumers. 

Remunerate both capital and operational expenditure upfront, passing through the actual costs incurred straight to consumers, thus potentially removing the need for financing.

  • Whether an additional return (either through a higher Weighted Average Cost of Capital (WACC) or a margin on internal or external costs) is warranted for the ESO. 
  • Benefits of a two-sided incentive.

In our response we set out our concerns around Ofgem’s proposals and detailed our own proposal for a layered funding model for the ESO. We believe our proposed model will best deliver consumer benefit, recognise the type of business the ESO is and ensure we are a flexible, sustainable and financeable business, set up for the future. 

We submitted our response to this consultation on Friday 5th July. Following the links below you can read our detailed response alongside an independent report carried out by KPMG. We will continue to work with Ofgem and stakeholders over the upcoming months to develop a funding model that enables the ESO to deliver its ambitious, stakeholder-led business plan and benefit for consumers.

If you have any questions or would like to discuss this topic in more detail, feel free to get in touch with one of the team by emailing [email protected]