Modifications to electricity distribution licence Special Conditions to enable TMO4+ connections reform

What changed

Ofgem has created a new pass-through mechanism inside the existing RIIO-ED2 price control to let the fourteen DNO licensees recover the one-off costs of implementing TMO4+ Connections Reform, specifically the Gate 2 to Whole Queue Exercise. The decision followed a statutory consultation that opened on 21 August 2025 and closed on 19 September 2025; the outcome was published on 2 December 2025. The licence modifications to the electricity distribution Special Conditions take effect on 27 January 2026.

The mechanism is not an open-ended cost recovery. Alongside the licence changes, Ofgem has created a Connections Reform Costs Governance Document (Annex B) that defines which costs are recoverable and the obligations DNOs must meet to claim them. The pass-through sits outside the RIIO-ED2 ex-ante allowance: it is an addition to the price control, not a reallocation within it. The justification is that the Gate 2 to Whole Queue Exercise is a one-off reshuffle of the connections queue driven by a policy change Ofgem itself instigated, not a cost the DNOs could have forecast when their RIIO-ED2 settlements were fixed.

What this means in practice

DNOs are insulated from the cost of administering Connections Reform. The Whole Queue Exercise requires every DNO to reassess its entire connections pipeline against the new Gate 2 readiness criteria, contact each project, process the responses, and re-sequence the queue. That is a large, time-bound administrative undertaking with no analogue in the original RIIO-ED2 cost assessment. By making it a pass-through rather than an efficiency-incentivised allowance, Ofgem has decided the DNOs should not bear the risk of this cost overrunning, on the logic that they did not choose the reform and cannot manage the volume of work down.

The consequence is that the cost falls on consumers through distribution charges, with no efficiency discipline on the spending itself. A pass-through removes the incentive to economise that a fixed ex-ante allowance creates: the DNO recovers what it spends, subject to the governance document's definition of "reasonable" and "recoverable" costs. The governance document is therefore the only thing standing between a defined cost-recovery route and an uncapped one. Its function is to constrain what counts: which activities, which cost categories, what evidence a DNO must produce to claim. How tightly it is drafted, and how actively Ofgem scrutinises claims against it, determines whether this is disciplined cost recovery or a line consumers pay without question.

This is the recurring pattern in network cost allocation. A policy change creates a compliance cost; the regulated monopoly is protected from absorbing it; the cost is socialised to consumers who had no say in the reform and face no choice about paying. The defensible part of the design is the recognition that the Gate 2 to Whole Queue Exercise is genuinely exogenous to the DNOs and genuinely one-off, which is a weak case for loading it into a forward-looking efficiency allowance. The weak part is that "pass-through" with a governance document is a substitute for a price, not a price. Nobody administering the exercise faces a budget constraint they cannot pass on, so the only check on cost is Ofgem's willingness to challenge claims after the fact.

Numbers to watch: the decision documents (the 247KB decision PDF and the 169KB governance document) set out the recoverable cost categories but no headline figure for the total expected pass-through. That number will emerge through DNO claims once the Whole Queue Exercise runs. Anyone modelling distribution charge trajectories through RIIO-ED2 should treat this as an uncosted addition to the control until the first claims are published.

What happens next

The licence modifications are made and take effect on 27 January 2026; there is no further consultation on the mechanism itself. The live questions are all downstream.

First, the Gate 2 to Whole Queue Exercise has to run. That is governed by the broader Decision on Connections Reform Package (TM04+), the substantive reform this pass-through funds. The timing of DNO cost claims will track the exercise: costs are incurred as DNOs work through their queues, so the pass-through will populate over the period the reshuffle runs rather than as a single charge.

Second, watch how Ofgem operationalises the governance document. The credibility of the design rests on Ofgem actively testing claims against the recoverable-cost definitions rather than waving them through. There is no published reporting commitment in the consultation page itself, so the question is whether Ofgem publishes the claimed and approved amounts per DNO. Without that transparency the governance document is unauditable from outside, and the only assurance consumers have is Ofgem's internal scrutiny.

Third, this sets a precedent. The pass-through is scoped to one one-off exercise, but the structure (regulator-instigated reform, monopoly protected, cost socialised via a governance-document-bounded pass-through) is portable to the next reform that imposes unforecast costs on networks. The RIIO-ET3 and future ED price control debates will reference how well or badly this mechanism is policed as evidence for whether pass-throughs are a tolerable tool or a default escape valve from ex-ante discipline.