RIIO Overview RIIO stands for “Revenue = Incentives + Innovation + Outputs.” It is a framework used by the industry regulator to ensure that individual network companies, like SP Energy Networks, provide a safe and reliable service, value for money, maximise performance, operate efficiently, innovate and ensure the resilience of their networks for current and future customers. R = Revenue I + Incentives The mechanisms used by Ofgem to encourage us to deliver improvements in areas that our customers value. I + Innovation Things we can do differently to provide a safe, reliable and sustainable network whilst delivering value for money to our customers. O Outputs Things our customers value: Safety Environment Customer Satisfaction Social Obligations Connections Reliability & Availability The electricity sector is currently operating in the initial or “RIIO-1” delivery period which runs from 1st April 2013 to 31st March 2021 (RIIO-T1) for Transmission network operators and from 1st April 2015 to 31st March 2023 (RIIO-ED1) for Distribution network operators. RIIO-2 will subsequently run from 1st April 2021 to 31st March 2026 for Transmission Operators and from 1st April 2023 to a-yet-to-be-confirmed end date for Distribution Operators. Network Companies, including SP Energy Networks, must submit their RIIO-2 Transmission Business Plans to Ofgem in the autumn of 2019 and their Distribution Business plans will be submitted around 2020 - 2021. Why do we need a RIIO price control framework? SP Energy Networks operates in a monopoly environment. In simple terms this means that there is no traditional market competition to govern revenue because we are the only owners and operators of the electricity network in our network areas. This is true for many network companies across different sectors (water, gas and electricity). It is more efficient to have a single network than to have multiple networks where costs would be duplicated. To mimic market competition and ensure value for money for consumers in monopoly environments, it is common place for industry regulators to use rules and directives to set limits on revenues, reward best practise and penalise for failures to deliver. In the electricity sector, the independent National Regulatory Authority is the Office of Gas and Electricity Markets (Ofgem). Ofgem uses a price control framework called “RIIO” to regulate GB’s electricity network companies. In contrast, Ofgem does not regulate the revenues which energy suppliers or generators charge bill payers (although they do regulate other aspects of these businesses). Instead, the charges levied by generators and electricity supply companies are controlled as a result of being part of a competitive market. That is to say, electricity companies can choose which generator to buy their electricity from and householders or business customers can choose which energy supplier they wish to use. If an energy supplier puts their prices up too high or fails to meet a customer’s expectations, those customers can generally show their dissatisfaction by switching supplier. Ofgem uses the RIIO price control framework to appraise electricity network companies’ business plans and to set the amount network companies can earn from charging others to use their respective parts of the GB network. The RIIO framework aims to put the customer or ‘end user’ at the heart of the network companies’ future business plans.