Lady thinking and looking at a computer screen

ESO’s response to Ofgem’s RIIO-2 Finance Methodology

In August 2019, Ofgem published its RIIO-2 Methodology for the ESO decision and consultation document.[1] This outlined decisions on the ESO’s RIIO-2 funding model, as well as consultations on the ESO’s financial methodology and parameters and the design of our incentives scheme.

Ofgem asked for stakeholder views on:

  • Its approach to setting the financial parameters within the ESO’s RAV[2]*WACC[3] funding model, including: allowed returns methodology; approach to financeability; the inflation index for the; WACC allowance and for RAV adjustments; Ofgem’s updated thinking in relation to risks; associated with the ESO’s revenue collection function; and other financial issues.
  • Several aspects of incentives design, including: include setting clear outcomes through the roles framework; introducing a more direct role for Ofgem in performance metric setting; strengthening behavioural incentives on the ESO to develop stretching and well-specified plans; streamlining the evaluation criteria; and potentially tailoring the evaluation approach to different areas of ESO activity.

In our response, we set out our view of Ofgem’s proposed financial methodology and parameters and incentives design, with alternative proposals where appropriate. As shown by our analysis and supported by stakeholders, a RAV*WACC model alone is not sufficient or appropriate for the ESO. Additional remuneration is necessary to cover the services we provide and the risks we hold that are not correlated to our RAV or mitigated through the RAV*WACC framework. This will enable us to be the proactive, ambitious ESO that stakeholders want.

We submitted our response to this consultation on Wednesday 25 September. You can read our detailed response alongside an independent report carried out by Oxera.

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].

Notes to eds:

 

[1] https://www.ofgem.gov.uk/system/files/docs/2019/08/riio-2_methodology_for_the_electricity_system_operator_-_decision_and_further_consultation.pdf

[2] Regulatory asset value

[3] Weighted average cost of capital