Electricity Decoupling in the UK

The regulation of the UK electricity distribution industry operates under a system of ex-ante price controls that are, by definition, based on forecasts of expected costs and required revenue. The gas and electricity networks are regulated under an RPI-X framework. This is an incentive-based regulatory framework. Revenue allowances are fixed in advance for a fixed period (typically five years). Some adjustment is possible during this fixed time period, but only for specified variables (e.g. changes in the volume of energy transported, customer numbers or certain costs over which the networks have no control), and inflation.

Under the UK model, a regulated network is able to retain financial benefits if it outperforms the underlying assumptions of the allowed revenue calculation. Similarly, if a company underperforms, it must bear at least part of the associated cost.

The UK model expressly recognizes that there is inevitable uncertainty about changes in costs, demand, and other factors during a price control period. Consequently, its system of regulation recognizes many changes that can be adjusted for at subsequent price reviews.

Several adjustment mechanisms are available; including:

• Pass-through: Allowing for automatic adjustments for costs that are considered to be outside the regulated company’s control;
• Revenue drivers: Adjustments to allowed revenue to reflect changes in specific parameters (notably volume, number of customers, or costs);
• Re-openers: These might apply to specific events (e.g. a change in legislation) or specific circumstances (e.g. a change in the finance-ability of a business).