Incentive Regulation of Electricity and Gas Networks in the UK: From RIIO-1 to RIIO-2

Abstract

The regulatory and operating context of energy networks is dynamic and constantly evolving. Achieving a multitude of economic, environmental, social and policy objectives is a challenging task for the sector regulators. In 2010, the UK energy regulator Ofgem replaced its approach to energy network price control and incentive regulation with a Revenue-Incentive-Innovation-Output (RIIO-1) model. This paper reviews the incentive areas that influence the performance of the next version of the model (RIIO-2). Guided by the principals of regulatory economics and evidence in the literature, we discuss key aspects of the regulation model that be revised by the regulator. The lessons of experience from the RIIO models are also relevant for regulators in other countries and can inform their design of incentive regulation of energy networks.

The effect of flow-based market coupling on cross-border exchange volumes and price convergence in Central Western European electricity markets

“…Table 3 shows the ENS of the electricity networks for the period from 2013 to 2020. The VOLL is considered to be 10 RIIO stands for Revenue = Incentives+Innovation+Outputs (Jamasb, 2021). The first phase covered the 2015-2023 period for electricity distribution and the 2013-2021 period for electricity transmission and gas distribution (OFGEM, 2022).…”

A hierarchical approach to designing an electricity distribution reward‐penalty scheme for service quality improvement

“…Results show the service quality improvement of customers. Reference 22 discusses the key aspects of the incentive regulation model that be revised by the UK energy regulator in Revenue‐Incentive‐Innovation‐Output (RIIO‐2) model. In Reference 23, the options were proposed for incorporating physical and cyber security costs within incentive regulation in a benchmarking approach.…”

The energy efficiency first principle in European energy and climate policy

“…In regulatory practice, the RIIO 82 scheme introduced in the UK in 2015 represents an important reference for PBR design for electricity DSOs in Europe. The preceding RPI-X framework, which is based on the retail prices index (RPI) minus expected efficiency improvements (X) focused on operational efficiency resulted in risk and innovation averse DSOs that were judged unfit for efficiently serving the consumers in the changing energy landscape (Mandel 2014;Jamasb 2021). The fundamental novelty of RIIO is that it recognises OPEX in a similar fashion to CAPEX, referred to as TOTEX incentive mechanism.…”