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Ofgem re-thinks framework as it seeks £32bn of investment

Gas and electricity regulator Ofgem is to shake up the sector’s regulatory framework as it seeks £32 billion of investment pipes and wires over the next 10 years.

The body said that vital investment in pipes and wires must increase by 75 per cent in the next decade in order for the UK to become a low carbon economy.

Environmentally friendly energy sources such as large scale wind, gas and nuclear plants as well as microgeneration set ups will require rewiring the country to create a “smarter network”, it said.  

Ofgem has developed a new RIIO model - Revenue= Incentives+ Innovation+ Outputs. Measures included in the model are the lengthening price controls from five to eight years, a stronger incentive scheme for network companies and giving companies greater power in delivering large schemes.

The regulator said that this new model would increase stability and efficiency in the industry as well as encourage better investment and new sources of finance.

Ofgem estimates the RIIO model could cut the cost of investment to consumers by £1 billion compared to the previous regulatory framework in the next ten years.

Ofgem’s chief executive Alistair Buchanan said: “£32 billion of the £200 billion investment challenge Ofgem has identified falls to the regulated energy networks and is within our statutory remit. That is why Ofgem’s new performance regulation model, RIIO, will ensure we attract this investment, but at a fair price for consumers.

“RIIO also gives consumers and network users a bigger voice in what they want network companies to deliver and then rewards companies that take the initiative and deliver this efficiently, while financially penalising laggards and subjecting them to closer regulatory scrutiny.”

Ofgem’s new regulatory framework will first be applied for the next two price controls - for gas distribution and gas and electricity transmission, which are not due to start until 2013.