The bill for upgrading the UK's network of electricity wires and gas pipes will double the rate of investment over the past 20 years. It is just part of the more than £200 billion that needs to be invested in energy over the next decade.
As well as new fossil-fuelled plants to replace existing ageing generating stations, new cleaner generating capacity is needed to meet the UK's renewables and low-carbon targets. By 2020 renewables are expected to supply around 30% of UK electricity, up from roughly 7% today.
Wind alone will supply some 20%, with increased amounts of wind generation sited away from centres of population - much of it offshore and in the Highlands and Islands of Scotland.
The existing electricity network is inadequate to meet the demands of these more dispersed and often variable forms of generation. Nor can it cope with the complexities posed by small-scale renewables and microgeneration, "smart" metering and shifts in how people use energy, such as charging electric cars overnight.
To encourage the investment, Ofgem is moving to a performance-based model that rewards companies that innovate and perform above expectations, and penalises those that fail to deliver efficiently. The new Revenue = Incentives + Innovation - Outputs (RIIO) framework also extends the period of price controls on the revenue that companies are allowed to earn - from five to eight years. This will provide more stability, says Ofgem.
The RIIO model covers both the high-voltage transmission grid and the local distribution network, as well as the network of gas pipelines. It follows extensive consultations with industry commentators and consumer groups and will be introduced from the next price control periods in 2013.
Cutting investment costs
Ofgem claims that the RIIO model will cut the cost of network investment by £1 billion compared with the current RPI-X formula, which takes the retail price index (rate of inflation) and subtracts an efficiency factor. Nonetheless, the regulator estimates that the £200 billion of total energy investment needed will raise energy bills by between 14% and 25%.
Helping to counter the extra cost to consumers will be the government's programme of energy efficiency measures.
Ofgem chief executive Alistair Buchanan says that efficiency and innovation will be "hard-wired" into the network companies. However there will be no gold plating of the networks at customers' expense.
RIIO also gives consumers and network users a bigger voice in what they want network companies to deliver and then rewards companies that take the initiative and deliver this efficiently, while financially penalising laggards and subjecting them to closer regulatory scrutiny.
Gordon Edge, RenewableUK's director of policy, says that the new investment will bring cost savings in the long term and ensure the UK's energy independence.
"The energy mix is changing. Currently, we have around 75% of our electricity supplied from fossil fuels," says Edge.
"However, beyond 2020 we will be moving towards an 80% decarbonised electricity supply, which can only be good for the country as a whole. Upgrading the grid is key to achieving this."
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