Office of Gas and Electricity Markets

In July, Ofgem launched a review into cost allocation across the energy system, seeking to establish how the transition to a greener and more secure system should be paid for by consumers. It aspires to recover costs from consumers in ways that are fairer and more efficient, as well as supporting net zero and economic growth – it is concerned that, without changes, the likely combination of declining variable costs with a rising proportion of fixed costs could increase existing inequalities. It is now considering the feedback it received, with the aim of consulting on policy options in the spring. It is also undertaking trials to explore how domestic consumers respond to tariff designs which vary the standing charge based on their electricity usage during peak periods.

Ofgem is supporting key elements of the government’s Clean Power 2030 Action Plan, including networks and connections, consumer-led flexibility, market design and social schemes. Its role includes tightening incentives and penalties for electricity transmission owners and distribution network operators, prioritising grid connections to meet 2030 targets, and introducing the cap and floor scheme to support investment in LDES assets (with an ‘initial decision’ list of projects to be offered a cap and floor expected in Q1 2026 and a final list of successful projects due in the summer).

Running from April 2026 to March 2031, the third iteration of Ofgem’s RIIO framework is the upcoming price control period for electricity and gas network companies. Regulating the revenues that network companies can collect from consumers, RIIO-3 aims to ensure they have sufficient revenue to operate and invest in efficient networks. Released in July, Ofgem’s draft determinations provisionally permitted upfront expenditure of £24.2bn, a figure £8.5bn lower than the companies had requested and only a fraction of the £80bn investment programme in transmission expected during RIIO-3. (Ofgem’s aim of approving the rest once project costs are more certain has been criticised for reducing the certainty available to operators.) Many industry players also suggested that the returns proposed by Ofgem were too low to attract the necessary investment. Final determinations, published in December, reflect updated modelling and evidence from the network companies and are somewhat higher, enabling £28.1bn of upfront expenditure, in the context of a programme worth around £90bn.

From 27 January Ofgem will be the regulator for heat networks. The Heat Networks (Market Framework) (Great Britain) Regulations 2025, made under the Energy Act 2023, have created a new regulatory landscape for network operators and suppliers, including mandatory authorisation, technical and performance standards, and consumer protection measures. The regime does not include direct price regulation, although this is something that will be kept under review. Ofgem has said its approach to compliance will be flexible and proportionate, with an initial focus on working with the sector to embed the new rules. 

Ofgem recently launched a consultation on the outcomes of its end-to-end review of electricity network connection processes. Its proposals include stronger licence requirements, financial penalties and tougher enforcement to tackle the delays faced by developers. Seeking to tackle what it calls an “asymmetry of risk” – which sees developers bearing huge costs while networks face minimal consequences for failure – Ofgem will work on the new regime over the coming months, aiming to deliver improved process and outcomes for ready-to-go new clean power generation, large-scale storage, minor EV and heating connections, and energy-intensive sites such as data centres.