Ofgem has outlined significant challenges facing the gas distribution (GD) and gas transmission (GT) sectors as the UK moves towards its net zero targets.
Today, the energy regulator has announced its RIIO-3 Sector Specific Methodology Decision, outlining crucial guidelines for the GD, GT and Electricity Transmission sectors.
The regulator emphasised the critical need for safe and reliable gas networks during the upcoming RIIO-3 price control period, underscoring their essential role in the country’s energy landscape.
However, Ofgem acknowledged the uncertainties surrounding the pace and scale of transitioning away from natural gas.
This uncertainty primarily revolves around potential asset repurposing for hydrogen or carbon capture usage and storage (CCUS), as well as the potential decommissioning of assets by the 2030s and 2040s if they become obsolete.
The regulator said: “There is still uncertainty in the pace and scale of the transition away
from natural gas.
“This transition will be influenced by future national and devolved government decisions in relation to energy policy, the decarbonisation of heat and choices for how to reach the UK’s statutory net zero target and five-year carbon budgets.”
Ofgem stressed the need for a cohesive strategy to manage potential decommissioning costs and ensure fair distribution of historical investment burdens among consumers.
Regarding financial strategy, Ofgem has opted not to establish a decommissioning liabilities fund through RIIO-3, instead focusing on accelerating regulatory depreciation to align with declining gas usage trends.
This move aims to protect future consumers by ensuring they bear a fair share of network investment costs.
Moreover, Ofgem emphasised flexibility in its approach to accommodate evolving government policies and the unpredictable speed of the net zero transition.
Final determinations on regulatory depreciation rates for the gas sector are expected next year, in collaboration with industry stakeholders and government bodies.
In terms of operational sustainability, RIIO-3 will introduce new funding mechanisms and incentives to mitigate methane leakage, a potent greenhouse gas associated with gas network operations.
Lawrence Slade, Chief Executive of Energy Networks Association which represents the UK’s electricity network operators said: “The next price control framework must support and enable long term investment while allowing flexibility to adapt as needed.
“Today’s decision can lay the groundwork for the government’s clean power mission. To deliver cleaner, secure energy supplies will mean upgrading and, in some cases, building new infrastructure and in turn this will unlock jobs and multi-million-pound supply chains.
“We are committed to working with Ofgem to grasp that challenge and will be reviewing the detail of today’s announcement over the coming weeks. The ability to continue to attract and retain investment is vital to success.”
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