Our RIIO-T2 Business Plan

The business plan contained a comprehensive innovation strategy that explained how past innovation had been considered in the creation of the business plan and a detailed a structured proposal for RIIO-T2 period, focused on Net Zero challenges.

The business plan proposed expenditure of £13.5 million related to the Network Innovation Allowance (NIA) and Ofgem have allowed this in full.

As described in Ofgem’s sector specific methodology, additional funding was available to roll out proven innovations and SPT submitted a proposal for £5.2 million of expenditure. However, Ofgem made a decision not to award this funding.

Ofgem have approved our Environmental Action Plan and the associated funding.

We expect to publish our verified Science-Based Targets by the end of 2021.

We had proposed an Uncertainty Mechanism to cover the costs of delivering no net loss in biodiversity across the major networks projects in our baseline and to cover the cost of clean-up of legacy land contamination. In place of this, Ofgem provided us with a 'Use It or Lose It' allowance to cover such projects in T2. 

Various stakeholders had identified a lack of T2 incentive to encourage leadership in environmental impact reduction represented a significant gap at a time when the climate and biodiversity emergencies require accelerated action. Ofgem have responded to this by introducing an Environmental Scorecard symmetrical financial incentive.  We fully support this decision and believe that this Scorecard will allow us to focus internal action on priority environmental impact areas to drive better performance.

One of SPT’s Consumer Value Proposition (CVP) proposals was accepted by Ofgem at Final Determination: Maximise benefit from non-operational land. This CVP provides non-operational land to community groups to install up to 4MW of renewable generation and/or deliver biodiversity enhancements.

In our business plan, we proposed a Net Zero Fund, similar to our RIIO-T1 Green Economy Fund.

This fund is intended to use our central and impartial role within the energy system to ensure local communities are financially supported to maximise the social and environment and economy benefits of local energy solutions. The fund will support the creation of local jobs, deliver significant carbon savings and support our communities. We estimated that for every £1 we spent, we could deliver £3 worth of value to the economy.  This fund was supported by our strategic stakeholders. Ofgem determined that the size of the fund should be reduced to £5 million. We are the only Transmission Operator to receive this funding.  

We will be working closely with our stakeholders during RIIO-T2 to ensure that this fund’s potential is maximised to ensure wider societal benefit.

The de-carbonisation of generation in Scotland has occurred rapidly and the introduction of legally-binding Net Zero targets set the backdrop to our load-related investment plan. All of the projects in our baseline plan were approved by Ofgem in the Final Determination with the exception of Branxton, which we discuss below.

We set out a high-confidence baseline of 900MW for the generation we expect to connect and proposed a suite of uncertainty mechanisms to allow the plan to respond to changes in our customers’ requirements. The uncertainty mechanism provided in the Final Determination provides us with the means to respond to changes in generation applying to connect to the system.

Following the recent publication of the Energy White Paper (Powering Our Net Zero Future) and NG ESO’s updated Future Energy Scenarios which now reflect Net Zero, we expect to make extensive use of the uncertainty mechanisms to fund projects that were not included in the baseline.

An integral part of our plans to connect offshore wind generation was the creation of a new substation at Branxton in East Lothian. The new substation will also act as the connection point of the proposed Eastern HVDC Link and resolve some thermal issues in that part of the network. While Ofgem agreed with the need case for substation, they have decided that it should be funded via uncertainty mechanisms. We will make the necessary application at the appropriate time in the substation’s development programme.

Our plan also included expenditure to create additional capacity for electricity demand. A key element of this was supporting electrification of the rail network by providing new connections and increasing the capacity at existing supply points. We included increases of the capacity of existing connections to the distribution system and the creation of new supply points in response to requests from SP Distribution. Our baseline plan was approved and there is an uncertainty mechanism which operates in the same way as the generation mechanism which will accommodate any changes our customers require.

The most recent Network Options Assessment recommended a significant increase in the level of reinforcement that’s required to meet Net Zero targets. While the majority of the works will complete after the end of RIIO-T2, we are forecasting an increase in expenditure in this area compared to our business plan. The uncertainty mechanisms that form part of the RIIO-T2 package provide us with the means to adapt our plan to deliver these works.

The costs associated with refurbishment and replacement of assets is known as non-load related. Our business plan detailed our planned interventions in the RIIO-T2 period, supported by detailed evidence, comprehensive justifications and external challenge and assurance.

Ofgem approved all of our baseline projects and we are well under way in delivering the early projects in the portfolio. We identified six projects that had a degree of uncertainty and proposed that these be subject to a re-opener uncertainty mechanism, which Ofgem accepted. We will submit applications when there is sufficient certainty over the scope and timing of the projects.

For some assets, the Network Asset Risk Methodology is used to set a target based on the long-term monetised risk benefit of the planned interventions. Our target, known as Baseline Network Risk Output (BNRO) has been set at £29.3 billion and this is calculated by adding the risk benefit of each of the individual asset interventions in our plan. The BNRO is R£200 million greater than our business plan submission. This is not because of any changes to our plan but because the method of calculating the total BNRO has changed since we submitted our plan.

Network Operations:

Our business plan reflected the changing nature of our network as new technology is integrated and the network extends, connecting new renewable generation and providing the additional network capability required. We also undertook a comprehensive review of our maintenance and inspection practices and ensured that we applied new and innovative techniques to improve effectiveness and efficiency. Our plan was accepted in full by Ofgem and the costs have been allowed in full.

Indirect Expenditure: 

Within our business plan we submitted our view of the support costs that will be required to ensure delivery of our planned network investment as well as support the drive towards Net Zero. This took the form of costs that are closely associated to the assets we deliver and those that support the wider business function.

In total these represented £273 million of out total expenditure in RIIO-2. As per the price control review process Ofgem made some adjustments to the allowance we had submitted in relation to workload volumes reductions in our Load and Non load delivery of £4.8m and general efficiency reductions as a result of industry wide benchmarking of £8.4 million. Therefore, as per Ofgem’s final determination our Indirect allowances have been set at £260 million representing a reduction of £13 million, or just under 5%.

Our RIIO-T2 User Group was central to the development of that plan and provided crucial independent scrutiny and guidance during the development process, releasing their own independent report and assessment of our plans in December 2019.

The Group brought external representatives, independent experts and advisors – acting as a strong voice for our network users, customers and stakeholders during our decision-making processes.

Within our Business Plan we noted an intention to maintain the Transmission User Group throughout the RIIO-T2 period, providing the independent group with the opportunity to influence business decision making over the period, ensuring commitments are delivered and assessing performance.

Ofgem has not yet decided on a future enduring role or remit for these groups, however we have continued to set up the enduring group on the basis set out within the original business plan.  Following the conclusion of our Business Plan submission - former Energy Minister Rt Hon Charles Hendry stepped down as Chair of the Transmission User Group for SP Energy Networks. We are delighted that Angela Love has agreed to take up the position of Chair.

You can read more about our RIIO-T2 User Group here.

In developing the RIIO-T2 business plan, we only included baseline cost allowances where the need is clearly justified, timing of expenditure is understood, and costs are certain.

However, some areas of our operations naturally incur material costs which are difficult to forecast years ahead as they are subject to uncertainty outside our control. For these areas we proposed a suite of uncertainty mechanisms, both common and bespoke, to provide flexibility for the adjustment of revenues over the course of the T2 price control period.

Ofgem have sought to standardise uncertainty mechanisms as much as possible and we collaborated extensively with them and the other Transmission Owners to ensure each mechanism delivered optimal value for consumers whilst also facilitating the Governments ‘Net Zero’ ambitions. In the Final Determination the majority of our uncertainty mechanisms were accepted or repackaged under a new mechanism. A summary of the Uncertainty Mechanisms for T2 is shown below.

In developing our RIIO-T2 Output Delivery Incentive (ODI) proposals, we worked closely with stakeholders to identify the right incentives to help us maximise benefits for network customers, stakeholders and consumers as we continue to facilitate a Net-Zero future. SPT’s final incentive package contains seven incentives, six financial and one reputational.

These include our proposed Whole System ESO-TO Constraint Mitigation ODI, which has become the common SO:TO Optimisation ODI, and our Additional Contribution to the Low Carbon Transition ODI, which has been repackaged into the common Environmental Scorecard ODI.

Four bespoke incentive proposals were rejected by Ofgem at Final Determination, who took the view that these incentives were covered by other incentives or mechanisms or did not clearly evidence going beyond business as usual.

Relative to our T2 Business Plan, the maximum total reward and penalty from incentives has increased. The full list of T2 incentives can be found below, along with their financial value.

The SO:TO Optimisation Incentive was introduced as a two-year trial at the start of RIIO-T2. Following the trial period, we have published an evaluation of the incentive as part of SPT's SO:TO Optimisation Incentive Final Report, available here.