The Energy Transition | Ofgem sets out regulatory framework for GB electricity distribution from 2028

This week's edition explores Ofgem's sector specific methodology decision setting out the regulatory framework for electricity distribution networks from 2028, environmental compensation reforms for offshore wind developers, the new four-year cyber security strategy for the UK energy sector, and NESO's information request for high-voltage connections.

Ofgem sets out regulatory framework for GB electricity distribution from 2028

Ofgem has published its Sector Specific Methodology Decision (SSMD) setting out how it will regulate electricity distribution networks for the next price control period known as ED3, covering 1 April 2028 to 31 March 2033. 

The regulatory framework will form the basis for Distribution Network Operators (DNOs) to develop their business plans for the period, following which Ofgem will assess the costs and allowed returns that the DNOs will be permitted to recover through consumer bills. The process will culminate in Ofgem's draft and final determinations for RIIO (Revenue, Incentives, Innovation, Outputs)-ED3, which it expects to release in 2027.

A strategic theme throughout the SSMD is the requirement for DNOs to consider flexibility alongside physical network reinforcement. Ofgem calls this approach "build and flex", which it says will "optimise the existing capacities of the network" and enable investment decisions to be taken with a clear view of where additional capacity needs to be located. Ofgem states that it will continue to pursue development of the regulatory framework to streamline the use of flexibility. 

The decision also sets out an expectation for DNOs to take into account the National Energy System Operator (NESO)'s transitional regional energy strategic plans when developing their business plans. ED3 expands the role of Distribution System Operator, through which DNOs actively manage local electricity systems. The SSMD sets higher expectations for improved voltage and loss management, as well as more effective use of flexibility to deliver whole-system benefits.

Ofgem says that the ED3 period represents a significant step up in what it expects from DNOs across connections, customer service, resilience, environment, innovation and financial accountability.

Maintaining resilience and security within the distribution system is a growing concern, given the increased reliance on and demand for electricity. The importance of this is exacerbated by a greater likelihood of severe weather events as a result of climate change and by the system's growing vulnerability to cyber incidents.

The business plan's incentive concept has been retained within ED3, which operates in three stages. Each of these targets a different aspect of business plan quality. The first sets the minimum standards every DNO business plan must meet; failure to meet these will result in a financial penalty being applied. The second stage incentivises DNOs to submit cost proposals that Ofgem considers "efficient and well-justified"; operators who submit costs above the benchmark will receive a decreased funding allowance. The final stage rewards DNOs whose proposals are of a high-quality innovative nature and which are incorporated into the ED3 regulatory framework. The level of reward will be determined as part of the final determination.

DNO business plans are expected to be submitted this December.

Government reforms UK environmental compensation rules for offshore wind developers 

Amendments to environmental legislation broadening the range of environmental compensation options available to offshore wind developers have now taken effect. 

The reforms amend the Conservation of Habitats and Species Regulations 2017 and the Conservation of Offshore Marine Habitats and Species Regulations 2017, and are accompanied by new guidance to assist developers in applying the changes in practice. The government says the reforms aim to accelerate offshore wind deployment while expanding targeted environmental compensation measures to support nature recovery.

The accompanying guidance acknowledges that some offshore wind developments are expected to have an adverse effect on certain protected habitats, but nonetheless will receive consent due to the overarching benefits of the development. In these cases, consenting authorities will require compensatory ecological measures to be put forward in the course of the development's application. 

Previously, the types of environmental compensation available were strictly limited, and the government says that opening up a wider range of compensatory measures to relevant developers allows them to be more “strategic, effective and better suited to the scale of the UK’s offshore wind ambitions”. The government's press release cites examples of permitted measures, such as protecting seabird nesting sites, reducing predator numbers near protected colonies, or funding the restoration of native oyster populations.

Government announces four-year cyber security strategy for the UK energy sector 

The government has launched a four year cyber security strategy to protect critical infrastructure in light of its Clean Power 2030 goals. The strategy has been developed by the "quad partners": the Department of Energy Security and Net Zero, Ofgem, the National Cyber Security Centre (NCSC) and NESO. These four bodies will lead a collective effort to deliver improvements in resilience and cyber security developments within the energy sector.

The NCSC has reported an increase in cyber incidents and threats against critical national infrastructure, which has pushed the government to develop a strategy that directly addresses these threats. The quad partners have outlined five strategic outcomes they aim to deliver.

Understanding threat, vulnerability and risk

The partners aim to understand the cyber risks that face Great Britain's energy system and develop principles to support suppliers and operators in managing risks in their supply chains and by the end of 2030 have 'designated critical suppliers'.

Prevention through enhanced resilience

This involves increasing resilience across the entire energy system, with particular attention to new entrants who may not have the same level of cyber resilience as established market participants. It also includes plans to reform the network information systems regulations and to consult on broader reform of cyber regulation in the energy sector, including the possibility of having cyber resilience criteria for all Ofgem licensees.

Preparedness, response and recovery 

The partners aim to deliver improved threat detection capabilities and monitoring systems to safeguard the energy sector from cyber attacks. They will also consider how to make both government and industry more resilient to cyber attacks.

Monitoring, regulation and enforcement

The aim is to strengthen the regulatory framework through the proposed Cyber Security and Resilience Bill, which would expand incident reporting requirements and provide regulators with stronger enforcement tools. 

Partnership, culture and skills

The final outcome focuses on increasing awareness of cyber security within the corporate agenda of entities operating in the GB energy market and maintaining a cross-industry energy security and resilience taskforce made up of chief executives of energy market participants as well as the minister for energy.

NESO launches information gathering request for high-voltage connections 

NESO has issued an information gathering request to demand customers that are directly connected. Battery energy storage systems are excluded from this request, which also applies only to customers in the National Grid Electricity Transmission (NGET) area who have "Gate 2" phase 2 projects. 

NESO has confirmed that given the advanced stage of Gate 2 phase 1 projects, those projects are not included in the current request. NESO will, however, consider whether high voltage (HV) opportunities apply to those projects in future. 

Eligible customers are being asked whether they "are currently minded to pursue an HV connection" and to provide "the data needed to support HV feasibility studies". The deadline for responses is 5pm on Monday 15 June: if a customer has more than one project, it will need to complete a form for each of its projects. 

NESO emphasises that expressing a preference for a HV connection does not guarantee that one will be offered; any such offer would depend on the outcome of NGET's connection studies and the relevant regulatory arrangements. 

However, NESO has confirmed that, should a project express an interest and be awarded a HV connection, if it then chose to reject such offer, it would (as with any Gate 2 offer in the "Gate 2 to Whole Queue" process) be given a Gate 1 status and a Gate 1 agreement to vary would be issued. 

Next steps

NESO will directly contact all qualifying customers to ask whether they wish to pursue an HV connection of up to 400 kilovolts for individual projects. Any subsequent HV offers will be issued through the Gate 2 offer process. Between 16 June and 30 June, NESO will review the responses and, from 1 July, begin its phase 2 studies. 

Customers who consider that they meet the eligibility criteria but had not been contacted by 26 May should email transmissionconnections@neso.energy.

This article was written with the assistance of Alice Smith, Elise Hill and Maggie Hudson, trainee solicitors and Jackson Clay, solicitor apprentice