RIIO-3 Draft Determinations for the Electricity Transmission, Gas Distribution and Gas Transmission sectors

What this is about

Ofgem is consulting on the Draft Determinations for RIIO-3, the next five-year price control covering the three networks that operate as regulated monopolies: the electricity transmission owners (NGET, SHET, SPT), the gas distribution networks (Cadent, NGN, SGN, WWU) and the gas transmission system (NGT). RIIO-2 ends on 31 March 2026. RIIO-3 runs from 1 April 2026 to 31 March 2031. The companies submitted business plans in December 2024 setting out what they want to spend, what outputs they will deliver, and what return they need on capital. The Draft Determinations are Ofgem's response: how much of that ask it is prepared to fund, on what terms, and against what incentives.

This is the staging post that matters. The Sector Specific Methodology Decision (published 2024) settled the framework. The Final Determinations, which followed in December 2025, settled the numbers. The Draft Determinations are where the methodology turns into actual £-and-pence allowed revenue, and where stakeholders, network companies, generators, suppliers, large users, get their last formal chance to push back before the numbers harden. For the electricity transmission sector in particular, RIIO-3 is the settlement that funds the build-out required for the connections queue reform, the strategic transmission projects (ASTI/HND/CSNP) and the offshore reinforcement. The capex envelope and the cost of capital agreed here determine what consumers pay through transmission charges for the next five years and beyond, because RAV additions stay on the books for decades.

Options on the table

The Draft Determinations consultation is not a menu of discrete policy options in the way a methodology consultation is. By this stage of the price control process, Ofgem has already chosen its framework. What is open for challenge is the calibration: the size of the totex envelope, the cost of capital, the strength of incentives, the threshold for uncertainty mechanisms. The substantive debates that stakeholders are responding to are these.

The cost of capital settlement

The Draft Determinations propose a working assumption for the allowed return on equity and the cost of debt. Network companies want a higher cost of equity, arguing that the scale of RIIO-3 investment (especially for electricity transmission, where capex is several multiples of RIIO-2) requires Ofgem to attract genuinely new investor capital rather than relying on existing balance sheets. Consumer-side respondents push the other way: that a higher allowed return is a multi-decade transfer from billpayers to shareholders, locked in via the RAV, and that the regulated monopoly status of the networks already insulates equity holders from the risks that would justify a higher return in a competitive market. The Draft Determinations' chosen point on this spectrum is the single biggest revenue lever in the consultation. A 50 basis point change in cost of equity moves billions across the five-year period.

Totex allowances and ongoing efficiency

For each licensee, Ofgem has proposed a totex allowance that is materially below what the company asked for in its business plan. The Independent Report on Ongoing Efficiency, published alongside the Draft Determinations, sets the productivity assumption Ofgem is applying: the rate at which companies are expected to deliver more output per pound of input, year on year. Companies argue the efficiency challenge is too steep given supply chain inflation, labour scarcity in HV transmission engineering, and the step-change in delivery volumes. Ofgem's counter is that the historic delivery record under RIIO-2 has been below allowance in many areas, that contingency has been routinely banked rather than spent, and that the ongoing efficiency assumption reflects observable industry trends rather than a stretch target. The ET annexes (for NGET, SHET, SPT) and the GD annexes (Cadent, NGN, SGN, WWU) contain the per-company numbers. The question for respondents is whether the proposed allowances are deliverable, and what happens if they are not.

Uncertainty mechanisms and re-openers

A five-year price control set in 2025-26 cannot anticipate everything that will need to be built between 2026 and 2031. RIIO-3 leans heavily on uncertainty mechanisms: volume drivers, re-openers, pass-throughs, the ASTI-style framework for major projects, and bespoke arrangements for specific cost categories. The Draft Determinations propose where the boundary sits between funding inside the baseline totex and funding via uncertainty mechanisms. Networks want broader uncertainty coverage, because it shifts forecasting risk to consumers. Consumer advocates want a higher baseline with narrower uncertainty coverage, on the grounds that uncertainty mechanisms tend in practice to be one-way ratchets (allowances go up when costs rise, but rarely down when they fall). This is the most technically dense part of the consultation and the one where the long-run cost impact is hardest to forecast.

Output incentives and ODIs

RIIO is supposed to pay networks for outputs, not inputs. The Draft Determinations set out the output delivery incentives (ODIs) for each licensee: targets for reliability, customer service, environmental performance, connections delivery and innovation. The financial incentives attached to these targets are calibrated by Ofgem. Networks argue some targets are unachievable in the timeframe (particularly connections-related ODIs, where delivery depends on factors outside the network company's control). Consumer groups argue some incentives are too easy to earn and have become a routine top-up to base returns. The structural question, the one Robert's analytical framework keeps surfacing, is whether ODIs actually change network behaviour or whether they reward outcomes the networks would have delivered anyway. The Draft Determinations do not redesign the incentive architecture; they recalibrate the existing one.

The capex-revenue split and the WACC-on-RAV problem

Not formally an "option" in the consultation, but a tension running through every annex. Network companies are paid an allowed WACC on every pound of capex added to the RAV, regardless of whether the resulting asset is used. The Draft Determinations bake this structure in for another five years. Whether respondents engage with it depends on their framing: networks want a high WACC because that is their return; large users want a low WACC because they pay it; nobody in the formal consultation is asking the deeper question, which is whether a percentage return on capital is the right compensation structure for assets whose value to the system depends on throughput, not gross investment. That question is for the next methodology, not this one.

Questions being asked

The Draft Determinations Consolidated Questions document collates the full question set across the sector and finance annexes. The themes are these.

Finance and cost of capital

Questions covering the proposed cost of equity, cost of debt, capitalisation rate, regulatory depreciation, gearing assumption, and notional company financeability. Respondents are asked whether the proposed cost of capital is set at a level that allows efficient companies to finance their functions, and whether the financeability tests Ofgem has applied are appropriate. (This is the section where stakeholders re-litigate the whole CAPM-based approach, including the equity beta, the total market return assumption and the risk-free rate proxy.)

Totex and cost assessment

Questions on the totex baseline for each licensee, the disaggregation between load-related and non-load-related expenditure, the treatment of input price pressures, real price effects, and the application of frontier shift and ongoing efficiency. (Respondents are being asked: did Ofgem cut the right amount from the business plan, and did it cut it in the right places.)

Outputs and incentives

Questions on the proposed ODIs and their calibration, the boundary between baseline outputs and incentivised outputs, the financial cap-and-collar on each incentive, and the treatment of reputational versus financial incentives. (The substantive issue is whether incentive payments are reward for genuine outperformance or windfall from soft targets.)

Uncertainty mechanisms

Questions on the scope of volume drivers, the trigger thresholds for re-openers, the design of pass-through arrangements, the treatment of large infrastructure projects outside the baseline, and the boundary between uncertainty mechanisms and baseline allowances. (Networks will push for broader coverage; large users will push for narrower coverage; the question is where Ofgem lands.)

Sector-specific issues for Electricity Transmission

Questions in the ET annex and the per-TO annexes (NGET, SHET, SPT) on transmission load-related expenditure, the ASTI framework, connections delivery, NOMs (network output measures) for asset replacement, and the treatment of strategic projects emerging from the CSNP/HND process. (This is where the connections queue meets the price control: how much of the build-out is funded inside the baseline, how much via uncertainty mechanisms, and what the TOs are accountable for delivering.)

Sector-specific issues for Gas Distribution

Questions in the GD annex and per-GDN annexes on repex (the mains replacement programme), the future of the gas network under decarbonisation scenarios, the treatment of stranded asset risk, customer service ODIs, and the connections regime. (The structural question hanging over GD is what happens to the RAV if gas demand falls faster than RAV depreciation; the Draft Determinations do not resolve this but the responses will.)

Sector-specific issues for Gas Transmission

Questions in the GT annex on NGT's allowances, the treatment of declining throughput, the long-run cost recovery profile, and the interaction with hydrogen and CCUS infrastructure. (The smallest sector by revenue but the one with the largest structural uncertainty.)

Cross-cutting issues

Questions on the treatment of innovation funding (NIA, SIF and their successors), the consumer vulnerability and net zero allowances, the digitalisation strategy, cyber resilience funding, and the workforce resilience provisions. (These are the smaller line items where Ofgem signals its priorities for the period.)

How to respond

The consultation opened on 1 July 2025 and closed on 27 August 2025. Responses were submitted to RIIO3@ofgem.gov.uk.

The status on the published page is "Closed (with decision)". The Final Determinations were published in December 2025 and are linked from this consultation page under the decision field. The decision document is the operative one for licensees and stakeholders; this Draft Determinations consultation is now a historical record of what Ofgem proposed in mid-2025 and what changed between then and the December 2025 Final Determinations. Reviewing the Draft Determinations alongside the Final Determinations is the standard way to see which arguments landed and which did not. The response documents, including the per-company response ZIPs (Cadent, NGET, NGT, SGN, SHET, SPEN, NGN, WWU) and the consolidated email responses PDF, are published on the consultation page and remain accessible.