Following the initial implementation of riio, there remains a challenge for ofgem and the industry to develop totex models, and the cost assessment framework more generally, to accurately capture the varied characteristics that explain companies costs beyond scale and regional price effects, as per ofgems riioed1 models. Until recently, ofgem was the only regulator to have any enthusiasm for cost of debt adjustment mechanisms. Office of gas and electricity markets ofgem revenue. The riio ed1 price control set the outputs that the 14 electricity distribution network operators dnos need to deliver for their consumers and the associated revenues they are allowed to collect for the eightyear period from 1 april 2015 to 31 march 2023. Aswath damodaran april 2016 abstract new york university. The approaches we take in setting the cost of capital are broadly similar, although ofcom and ofgem take a different approach in certain areas. Dnos revenue allowances also include an assumed cost of debt. Submission to victorian electricity distribution pricing.
Response to ofgem s consultation on the methodology for. There may well be elements from other sectors which enhance ofgems framework, but these should be scrutinised carefully given the high regard ofgems regulatory approach is. Ofgem, decision on strategy for the next transmission and gas distribution price controls riiot1 and gd1 financial issues, march 2011. This is based on our riio cost of debt index, which is updated each year. A response to ofgems cost of equity estimates in the riioed1 draft determination a report for enw, npg, spen and ssepd 22082014. Some network companies have made voluntary returns back to consumers when there has been overcharging during riio1. As such, uk power networks is seeking the full 100% reward against. Dnos need to deliver, their expenditure allowances and the allowed cost of capital. The cc is effectively forecasting it over the next 3. One model used a cost driver that reflected a weighted average of the drivers used in each of the disaggregated models bottomup csv, see below.
Reduced cost of capital and therefore cost to customers. A further important area where the rp5 and riioed1 price controls differ is that ofgem and the cc are estimating the cost of capital over different time horizons. It should be an integrated networked thing, that has the benefits of central station generation and transmission with the. Guide to the riioed1 electricity distribution price control ofgem. Northern ireland electricity rp5 price control reference ur paper on cost of capital and financeability introduction. The findings, figure 1 showed some concern that the industry is not fully ready for totex and more work is required. Draft determinations for the slowtrack electricity. By heather payne the problem were trying to solve is that we all know what the grid is supposed to look like. For ofgem it is to be implemented immediately at the start of riio2. We have not received evidence to convince us that dnos have embedded sufficient savings in their business plans. I would like to thank everyone at ofgem and the authority for their clearheaded responses, and their ability to deal with the unexpected and get on with the job. The swiss army knife of finance aswath damodaran april 2016 abstract there is no number in finance that is used in more places or in more contexts than the cost of capital. Our indicative view of the cost of equity for riio ed1 over 1y and longrun time frames.
Total market return for determining the cost of equity at riio2. We understand that the urs draft determinations were informed by advice from first economics set out in its 15 january 2016 report. Ofgem riio ed1 ofgems first electricity distribution price control. Each of these aspects of the dds is considered in more. Ofgem for the next electricity distribution price control riio ed1. This was the third year of the riioed1 price control. Guide to the riioed1 electricity distribution price control. A response to ofgems cost of equity estimates in the riio.
Description of ofgem riio price controls price control years number of networks gas distribution riio gd1 apr 20 mar 2021 8. We expect both ofgem and the network companies to be in a better position to apply the principles of the riio framework in future price controls. The appropriateness of the current planned investment in it for the capital programme over the coming regulatory period. In corporate finance, it is the hurdle rate on investments, an optimizing tool for capital. Ofgem case study 2 energy price control appeal does. Draft determinations for the slowtrack electricity distribution companies financial issues sp energy networks response 26th september 2014 page 2 of 7 financial issues overview we welcome the opportunity to comment on ofgems slow track draft determination for riio.
Both of these challenges were dismissed by the cma. Final determinations for the slowtrack electricity distribution companies overview 5 finally, we dont believe that the dnos have sufficiently considered the potential savings they can make to the cost of running their networks by adopting smart grid solutions. Capm to estimate its initial cost of equity range, as in previous determinations. The riio model gives companies strong incentives to meet sustainable energy challenges at lower cost. Total market return for determining the cost of equity at.
Wacc methodology appears to make riioed1 higher risk than rp5. Gb regulatory approach riio price controls and distributed. The riioed1 price control set the outputs that the 14 electricity distribution network operators dnos need to deliver for their consumers and the associated revenues they are allowed to collect for the eightyear period from 1 april 2015 to 31 march 2023. Review of ofgems initial cost of equity proposals for riio2 oxera 3 whether to index the cost of equity. Using our forecast for the cost of debt index for 201516, a 6. A companys cost of capital is the cost of its longterm sources of funds. Ofgem open letter consultation on approach to setting the. Overview of riio framework a report to aeegsi october. Cost of capital annual update report the uk regulators network. Grid commissioned nera economic consulting nera to consider the evidence for the total market return tmr for determining the cost of equity at riio2. Ofgemled dg forum events and riioed1 incentive on connections engagement ice introduced to focus dnos on. Ofgem is in the process of setting the next price control for transmission, riiot2, which will run april 2021 to march 2026. The cost of capital is the companys cost of using funds provided by creditors and shareholders.
Help to minimise the environment impact of dno operations. The first chapter looks at the setting of the allowed cost of equity, including the riskfree rate component. Decision on our methodology for assessing the equity. Ofgem fasttracked scottish tos at riiot1, and wpd at riioed1. In this paper we set out cepas initial assessment of the weighted average cost of capital wacc for riio ed1 and provide our initial comments on the dnos business plans.
In our experience successfully implementing totex is a mission possible. Final determinations for the slowtrack electricity. Riio price controls and distributed generation october 2016 james veaney. Friday 22 november 20 ofgem requires electricity network companies to deliver more for less.
It is important that consumers receive adequate returns on their. Regression results for totex based on capital consumption cost of quality 82. As part of this process, in june 2019 sse published its draft usiness plan entitled za network for net zero. Ofgem s proposals in its draft determination for riio ed11, ofgem proposes a cost of equity of 6% as set out in its cost of equity decision earlier this year. The information we received was sometimes in draft form and we saw various iterations of. We continue to consider that there are substantial additional savings which dnos can achieve through smart grids, smart metering and innovation in riioed1. The feasibility of total cost benchmarking at riioed1. Is the cost of incentivising improved plans through fasttracking too high andor unfair. In riioed1, ofgem set totex allowances for the slowtracked companies using. Pdf distribution of electricity has been considered as a natural. Section 2 provides context for setting an appropriate cost of capital for the riio 2 price. Participating regulators have signed up to the ukrn cost of capital principles1 to ensure continued collaboration. A proposed new price control incentive for riioed1 that aims to improve the average overall time. And the cost of each source reflects the risk of the assets the company invests in.
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