The consultation on the draft determination for RIIO-2 closed on 4 September. Hydrogen East submitted a response; the condensed version of which is provided below. It focused primarily on the Net Zero re-opener and the risk of stifling investment in Net Zero solutions by not providing adequate clarity or flexibility in the price control. We await the outcome from Ofgem’s consultation in due course.
In our view, Ofgem’s proposed approach fails to recognise that hydrogen is an emerging commodity that could offer wide-ranging benefits to carbon abatement across a number of vectors and hard to reach sectors, and which is likely to see adoption as a key policy goal as early as 2021.
In particular for East Anglia, which is well-positioned to become the UK’s clean growth region, hydrogen could well become a transformational energy source that could catalyse the local economy. Policy needs to encourage and facilitate innovation projects across Great Britain, but especially in areas where there is an invaluable infrastructure asset around supply of gas.
Considerations for how licensees will be able to fund Net Zero activity should be a core component of the price control, rather than added on as a contingency measure. While we understand Ofgem’s mandate to ensure value for consumers, we are concerned that the risks (and costs) in delaying Net Zero investment until there is greater certainty are not being given due weight when being considered against the risks of misplaced or mis-timed investments. As the timescale to enact Net Zero solutions compresses, the cost of implementing them increases.
In general, we find the proposed arrangements in RIIO-2 do not create the right incentives on the companies to innovate and take a leadership role on hydrogen innovation and existing system repurposing. We feel that the high stakes investment required to achieve Net Zero ambitions through less-established technologies would be best facilitated though an investment provision in the baseline, rather than almost solely through potential approvals for uncertainty mechanisms.
As it stands, the majority of hydrogen developments would be funded through the Net Zero re-opener, and we have concerns regarding the proposed approach. While we applaud the provision that allows the Net Zero re-opener to be initiated at any point during the price control period, we feel that it would benefit from additional flexibility compared to the common approach for re-openers. Ideally, we would like to see:
- licensees able to initiate the re-opener, rather than Ofgem alone
- definition of the re-opener triggers that Ofgem will use and how licensees and stakeholders can submit relevant developments to the regulator
- distinction between BAU funding of innovation projects using existing technologies, and the riskier proof-of-concept investments that are needed to bring new technologies and applications to the market
- a case-by-case approach to materiality thresholds.
We also feel that Gas Transmission should be able to use the Heat Policy re-opener mechanism alongside Gas Distribution. There seems to be an overwhelming case that two of the five defined triggers are directly relevant to the licensee’s business. They are; ‘changes to the regulations relating to the quality and composition of gas’ and ‘the future role of gas networks in the heat sector as determined by government policy that may result in parts of the existing network either being decommissioned or made ready to convey hydrogen.’