The Energy Regulation and Markets Review - Stikeman Elliott

United Kingdom
against each other. The quid pro quo for the grant of monopoly rights is that the network
operator must provide regulated third-party access and that it is subject to price control.
In terms of specific geographical areas, National Grid Electricity Transmission
plc (‘NGET’) holds a transmission licence in respect of the electricity national grid
that covers the whole of Great Britain. There are other transmission licences, but all
have licences limited to a particular area. National Grid Gas plc (‘NGG’) holds a gas
transportation licence which similarly covers the whole of the National Transmission
System (NTS) in mainland Great Britain. There is no licensable activity analogous to
distribution in the gas sector, even though there is a high-pressure system (the NTS) and
a lower-pressure system (local distribution zones or LDZs). All transportation of gas,
whether it be through the NTS or LDZs, requires a transporters licence. The grant of a
licence does not confer exclusive rights, although the rights of licensees may be restricted
to a certain area. In any event duplication of network assets in an area where there is
access to existing infrastructure would face challenges from local planning authorities.
Consumers have been free to choose their energy supplier for over 10 years. Ofgem
monitors the retail, and in particular the domestic, market very closely and is concerned
that there is still insufficient switching of suppliers by customers. It has been very active in
this area and is currently undertaking a retail market review, the most recent stage of which
is a consultation on improving the reporting transparency of large energy suppliers so that
consumers can compare tariffs more easily. There is also concern about the dominance of
the big six energy suppliers, who according to Ofgem share 99 per cent of the domestic
supply market between them. 14 In a recent report 15 published by the Institute for Public
Policy Research, this dominance is identified as having a negative effect on competition in
the retail energy market leading to increased prices for consumers.
iii Rates
As previously mentioned, network assets are subject to price control, which is implemented
by licence conditions specific to each licensee.
Historically, price control used the RIP-x model, but following a review this was
changed to the RIIO model – revenue set to deliver strong incentives, innovation and
outputs.
Revenue that can be earned by a regulated entity is limited in order to ensure timely
and efficient delivery, the ongoing financeability of network companies, transparency
and predictability and a balance between costs paid by current and future consumers.
Entities will be incentivised to deliver outputs efficiently over time, with a focus on
the longer term – including eight-year prior control periods, rewards and penalties for
output delivery performance, a symmetric upfront efficiency incentive rate for all costs
and uncertainty mechanisms where they add value for customers.
Innovation will be encouraged through the use of core incentives in the price
control package, the ability to pass responsibility for delivery to third parties and stimulus
for innovation, building on the Low Carbon Networks Fund. Outputs will be set out
14 Ofgem – ‘The Retail Market Review’ – Findings and Initial Proposals 2011.
15 IPPR – ‘The True Cost of Energy’ April 2012.
325