SP Energy Networks has submitted its response to Ofgem’s Draft Determination (DD) consultation for RIIO-T3.
Introduction
We welcome the RIIO-T3 Draft Determination (DD) and its intention to support the Clean Power 2030 (CP2030) ambition, aligning with Ofgem’s statutory duties on growth and net zero.
Our response outlines the essential changes needed to make them achievable and address critical funding gaps.
We are confident our proposed adjustments to the Draft Determination will enable us to deliver the transformation needed to meet our shared decarbonisation goals.
Read our response in full (238 pages)
We are strongly aligned with Ofgem’s policy intent to enable CP2030, as stated in the Draft Determination: “RIIO-3 is our opportunity to implement a regulatory framework for energy networks that will help GB accelerate its transition to a clean power system by 2030.” However, our analysis of the package reveals critical funding gaps, where cuts have been made by Ofgem without any proper basis which risk undermining our shared CP2030 mission.
As we move into the final phase of the review, we believe that a successful outcome will require Ofgem to address three key areas:
Investability
In order to ensure the framework supports this long-term, the evidence points to the need for a return in excess of 6% at 55% gearing. Ofgem’s proposed return on equity, in the Draft Determination, falls significantly short of the level supported by robust joint evidence from Transmission Owners (TOs). The level of return is lower than those available in comparable international markets—where nominal equity returns of 9–10% are routine.
To compete globally for capital, strong performing UK transmission networks must offer a reasonable expectation of double-digit nominal returns and a meaningful premium over debt alternatives.
Cost Assessment
We want to work with Ofgem to establish a fair and transparent approach to benchmarking costs, not an approach that results in c.60% underfunding of our indirect costs*. The consequence of which will undermine the resources required to deliver the scale of projects, in accelerated timescales, necessary to meet CP2030 targets.
The application of a 50:50 weighting between historical and forward-looking data is wrong. This method does not adequately reflect the step change in growth required by the Scottish TOs. In practice, there is a clear structural break between historical trends and the RIIO-T3 period, indicating that past data is no longer a reliable predictor of future needs.
Delivering the required investment in RIIO-T3 at pace will depend on having the necessary internal resources and skills at the right time. Critically, this would mean we cannot fund essential engineering resources—such as design and early-stage engineering work—that are required well in advance of project delivery. Our indirects activities are not a consequence of our investment but drive and enable delivery.
In our main response, we propose a series of practical and evidence-based alternatives for Ofgem to resolve the flaws in their approach to cost modelling.
Our preferred approach is to use forward-looking regression analysis based on Best View data on the basis that this approach will provide the most robust view of the level of indirects investment required to support growth.
*SPT Best View forecast v ex-ante baseline allowances
Incentives and Growth Mechanisms
Creating the right conditions to foster innovation, efficiency, and growth is essential, particularly as 86% of our expenditure is now enabled by growth mechanisms. As such, we have a critical dependency on the effective operation and administration of these mechanisms.
We support the ambition behind the introduction of new incentive mechanisms. We remain mindful of the significant engineering effort required to define their operation and ensure their seamless integration into licence-based delivery, including the target date setting of the CSNP-F, as well as well-established ODIs.
Following our analysis of the ODI package, the proposed targets and criteria set by Ofgem in individual ODIs have made the targets unachievable with little reward likely to be available.
Although maximum reward and penalties appear to be more symmetrical for the RIIO-T3 package, the likelihood of achieving rewards has decreased significantly since RIIO-T2. Our likely forecast, based on a number of uncertainties and assumptions show it is more likely to be around 0.1% of RoRE**
These elements are fundamental to ensuring the framework is robust, fair, and capable of supporting the long-term transformation of the energy system.
Stakeholders
Our Independent Stakeholder Group (ISG) known as SPEN’s ‘Independent Net Zero Advisory Council’ has submitted a response separately. We are of the view that the ISG brought considerable benefits to our business plan and there is an enduring role for the ISG.
Next Steps
SP Energy Networks is committed to delivering exceptional value for consumers and, supporting the transition to a sustainable energy future. Our plan is fully aligned with the assumptions and forecasts in the Future Energy Scenarios (FES) of the National Energy System Operator (NESO), and its Clean Power 2030 advice to the UK Government.
We need Ofgem to implement mechanisms that provide funding in a timely manner. If designed and implemented correctly these mechanisms will be a catalyst to growing our business at the right time, enable the efficient delivery of the required transmission networks upgrades, at proportionate cost to consumers, mitigating long-term impacts on consumer bills and supporting a smoother energy transition.
We are confident with our proposed adjustments to the draft determination we will deliver the transformation, within our licence area, and fully achieve shared decarbonisation goals.
Our Draft Determination Response
Our Draft Determination Supporting Documents
Finance
Indirects Cost Assessment
RPE and OE
Business Plan Incentive
Environmental Sustainability
Incentives
