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Energy Central: UK RIIO Sets Out to Demo How a Performance-Based Reg Model Can Deliver Value

Posted by Coley Girouard on Jun 11, 2019

Energy Central republished this case study, originally published by Utility Dive, as the final installment in a six-part series on utility business model reform produced by Rocky Mountain Institute, America's Power Plan, and Advanced Energy Economy Institute. See excerpts below and read the entire EC post here.

In the United States... traditional cost-of-service regulation favors utility capital investment in long-lived assets rather than rewarding utilities for their performance against desired policy objectives and it discourages utilities from taking advantage of the general shift in the economy to service-based solutions provided by third parties. 

A decade ago, the United Kingdom's Office of Gas and Electricity Markets, known as Ofgem, set out on a mission to develop a new regulatory framework that would reward utilities for innovation and for meeting the changing expectations of consumers and society. The culmination of that process was the development of a framework referred to as RIIO.

The U.K.'s RIIO framework — Revenue = Incentives + Innovation + Outputs — is widely regarded as the most comprehensive performance-based regulatory system developed to date, aiming to reward utilities for achieving desired outcomes. To better understand how RIIO works, we break it down into four main features:

A multi-year rate plan: Ofgem sets baseline revenues that utilities can collect for an eight-year rate period. The plans include revenue adjustment mechanisms dependent on utilities' performance against pre-set targets as well as uncertainty adjustment mechanisms for unpredictable cost changes or events.

The multi-year rate plan is intended to incentivize longer-term investments that are needed to transition to a modern grid. It also gives utilities an incentive to spend efficiently because if they deliver a project under budget they can keep a portion of the cost-savings as profit, with the remaining portion retained by customers. Cost overruns are also shared between the utility and customers...

RIIO is too new for any of the utilities to have completed a full eight-year rate plan cycle or to allow full analysis of RIIO's effectiveness. As of 2019, the electric transmission operators (TOs) are about 75% through their existing set of rate plans, while the electricity distribution utilities (EDUs) are about halfway through. But results to date have been mixed...

Read the entire EC post here and download the five case studies and related report ,"Navigating Utility Business Model Reform," which provides a menu of options for pursuing reform at the state level here.

Topics: AEE In The News