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Crystal Balling: Preparing Business Plans in an Uncertain Energy Sector

August 2019
Fernando Dominguez

The main long-term challenge facing the regulated energy sector is arguably the requirement to facilitate the delivery of zero net emissions by 2050 across the economy. To support the delivery of this target, the energy companies will need to adapt their assets over the next thirty years. But the adaptation required will depend upon the approaches and technologies selected to deliver this target. For example, gas distribution companies would face different investment patterns if both heat and transport are decarbonised using electricity relative to one, or if both are decarbonised using hydrogen or biomass-based methane.

In the short term, this significant challenge means that companies need to put together, as part of their RIIO-2 submissions, investment plans for the next five years before there is any clarity about the long-term services that they need to deliver. As a result, they are required to expect the unexpected and plan accordingly.

This presents the challenge of developing a business plan that optimises the evolution of the networks against the range of different scenarios, taking into account the ability to dynamically adapt activities and investments as additional information is learnt. Strategies that prepare for multiple outcomes are likely to include activities and investments that turn out not to be required. Ofgem’s final proposals will therefore need to ensure that network companies are not penalised for correct/efficient decisions and planning even where these lead to stranded costs.

Read the full paper.

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