Role of engagement in RIIO2

Energy network companies used customer and stakeholder engagement as a critical source of evidence for their RIIO 2 business plans. However, Ofgem’s draft determinations rejected a large proportion of companies’ bespoke proposals, even though most were accompanied by customer and stakeholder support. What does this mean for the future of customer and stakeholder engagement in the sector, and in particular for electricity distribution companies as they prepare their RIIO 2 plans?

The draft determinations do not provide a detailed account of the way that customer and stakeholder views presented by companies influenced Ofgem’s decisions. However, reading between the lines, we think that a Venn diagram of expectations emerges:

1. Robust customer and stakeholder support

Evidence of robust and comprehensive customer and stakeholder engagement is a ‘necessary but not sufficient’ condition for a high-quality business plan. 

Examples of the ‘necessary’ side of the equation include:

  • The fact that Northern Gas Networks’ business plan was judged as below minimum standards for failing to provide adequate stakeholder engagement evidence for smart meter roll out costs.
  • The numerous Consumer Value Propositions, Outputs and Uncertainty Mechanisms which were rejected on the basis of lack of consumer and stakeholder support.

We think this suggests companies need to make sure their engagement comprehensively covers all of the bases. This looks to be more important in Ofgem’s eyes than high volumes of engagement, or new and innovative research methods.

However, support from customers and stakeholders is not in and of itself sufficient for Ofgem to accept a proposal.

2. Evidence the proposed regulatory mechanism is beneficial

Ofgem seem to have favoured business plan proposals for outputs and Consumer Value Propositions that can be tied to a quantitative measure of benefit. 

A good example of this is National Grid Electricity Transmission’s proposal for an environmental scorecard, which can be tied back to reductions in carbon emissions. A second, is the set of biodiversity and the natural environmental outputs, where Ofgem allowed a Consumer Value Proposition from several companies, accepting that a benefit exists. However, Ofgem state they are unhappy with the approach companies used to calculate the magnitude of these benefits (e.g. willingness to pay studies) and will therefore work to develop a common method to value these initiatives.

Additionally, the evidence of benefit needs to go beyond the activity itself and include evidence supporting the proposed regulatory mechanism. A number of companies proposed reputational incentives that Ofgem rejected because they could be achieved through other means. Examples include Wales and West Utilities’ incentive to achieve accreditation for standards on inclusivity and customer service, which Ofgem stated they think the company would still achieve without an incentive.

3. Stretching above and beyond BAU and part of the role of a network company

Finally, network companies face a difficult balancing act between proposing stretching commitments that go beyond business as usual (BAU), while still staying within the envelope of what is appropriate for a company funded by customers’ energy bills.

For example, looking at Cadent’s plan:

  • Some proposals were rejected for lack of stretch beyond BAU. Proposals for a financial incentive relating to engagement with stakeholders on whole systems challenges fell foul of this requirement.
  • Other proposals were rejected for straying outside of the role of a network company, even though they were backed up with customer and stakeholder research. Cadent’s proposal to fund ‘whole home solutions’ including energy efficiency for customers in fuel poverty was strongly supported by stakeholders working with these customers. However, this was not enough to persuade Ofgem that it was part of a network company’s role.

Conclusion

Companies developing their business plans will need to bring together the results of different sources of customer and stakeholder insight, drawing on best practice. The content of Ofgem’s draft determinations implies this process needs to weigh each of the three factors discussed above – customer and stakeholder evidence is a necessary but not sufficient condition to convince the regulator.