Framework consultation: electricity distribution price control (ED3)

What this is about

Ofgem is opening the design phase for RIIO-ED3, the price control that will fund Britain's fourteen distribution network operators from 1 April 2028 to 31 March 2033. This Framework consultation comes first in the standard RIIO sequence: Framework, then Sector Specific Methodology, then Business Plans, then Draft Determinations, then Final Determinations. Get the Framework wrong and every later decision compounds the error. The Framework decision that followed this consultation is now the load-bearing document for the next five years of DNO regulation.

The timing is the point. ED3 covers the period in which electrification has to actually happen. Heat pump rollout, EV charging build-out, behind-the-meter solar and storage, and the connection of distributed generation all land on the distribution network during this control period. The previous control, RIIO-ED2 (2023-2028), was set when these volumes were forecasts. ED3 will be set when they are operational realities, and the DNOs will spend most of it explaining why they need more money than their Business Plans assumed. Ofgem's framing of "energy system transformation" and "net zero economy" is the rhetorical floor. The substantive question is whether the regulatory model can keep up with what the network actually has to do.

Options on the table

The consultation does not present neatly numbered options. It poses framework choices across several dimensions, and the real options sit inside those choices. The ones that matter for cost allocation and what gets built are below.

Totex versus capex/opex split

RIIO has run on totex (combined capital and operating expenditure) since RIIO-1, which removed the historic bias toward capex that rate-of-return regulation tends to produce (Averch-Johnson). The Framework reopens whether this should be revisited for ED3, given the scale of network investment required. The DNO lobby will push for arrangements that protect returns on the capex they need to deploy. Ofgem's interest is in keeping the incentive structure neutral between building new assets and using existing ones better (flexibility services, network sensors, voltage optimisation). Tilting back toward capex-favouring treatment would mean DNOs get paid more for steel in the ground than for solving the same problem with software, dynamic line ratings, or commercial flexibility contracts. That is the wrong direction for an electrification-era control.

Ex ante versus uncertainty mechanisms

The core RIIO bargain is fixed allowances set at the start with adjustment mechanisms (volume drivers, reopeners, pass-throughs) for things that cannot be forecast. The Framework asks how much weight ED3 should put on each. More ex ante allowance means more risk on the DNO if volumes exceed forecast, and more rent if they do not. More uncertainty mechanisms means consumers pick up the cost when volumes run hot, but reduces the deadweight of getting forecasts wrong. The LCT/EE role consultation and the LRE volume driver work, both already in flight, are the operational consequences of leaning further into uncertainty mechanisms. Whoever bears connection-volume risk in ED3 is being decided here, not in those downstream consultations.

Output delivery incentives and consumer outcomes

ED2 introduced a structure of Licence Obligations, Price Control Deliverables and Output Delivery Incentives, sitting alongside common incentives (CSS, IIS, CVI). The Framework reopens the balance between hard quantitative measures (interruption minutes, customer minutes lost) and survey-based or subjective measures (customer satisfaction, stakeholder engagement scoring). The empirical record matters. DNO common-incentive RoRE upside in ED2 has clustered on the subjective scoring lines (CSS and CVI net-rewarding by around £40 million) while the hard reliability measures (IIS) have been net-penalising (around -£51 million). If ED3 keeps the same balance, the same pattern recurs. The choice is whether to put more weight on things that are difficult to game, or more weight on things that DNOs have already learned to score well on.

Returns and financeability

The Framework opens the question of how cost of equity is set, what gearing assumption is used, and how financeability is tested. This is where the most money moves. A 50 basis point shift in allowed equity return across the GB DNO RAV of roughly £40 billion is around £200 million a year on consumer bills. ED2 used the CAPM with a beta range and an aiming-up adjustment. ED3 will revisit each component. The DNO investor case will be that rates have risen and risk has increased, so returns should follow. The consumer-side case is that regulated networks remain a low-risk, monopoly cash flow business and that the structural premium baked into past controls reflects regulatory politics rather than risk. The Framework decision sets the philosophical position; the Sector Specific Methodology sets the numbers.

Whole-system role and the DNO/DSO transition

The Framework also asks whether DNOs should be remunerated for taking on a wider system-operation role (Distribution System Operation, DSO). The substantive question is whether the entity that owns the wires should also be the entity that procures flexibility on them. Conflicts of interest are obvious, but full separation is expensive. The DNO LCT/EE role consultation (March 2026) is the live attempt to answer the narrower form of this question for low-carbon technology and energy efficiency. The Framework choice is whether ED3 makes this central or peripheral to the price control design.

Questions being asked

The consultation does not publish a numbered question list in the page text above. Ofgem's full questions are in the main consultation PDF. The themes that the Framework consultation explicitly invites views on, drawn from the published text, are below.

Overarching objectives

What the price control is for, and how Ofgem should weigh competing objectives across consumer protection, decarbonisation, network resilience, and sustainable economic growth. (The real question is the trade-off ranking when objectives conflict, which they will. A control optimised for cheapest bills now will not be optimised for fastest electrification.)

Regulatory model

Whether ED3 should retain the RIIO totex-and-incentives architecture in its current form, modify it, or move toward an alternative model. (Anything that increases reliance on ex ante allowances over uncertainty mechanisms shifts volume risk to DNOs and rewards forecasting accuracy. Anything that goes the other way shifts cost risk to consumers but reduces the deadweight loss of bad forecasts.)

Consumer outcomes

How consumer outcomes should be defined, measured and incentivised. Whether existing output delivery incentives are fit for the electrification phase, and what new outputs (connection times, flexibility procurement, network resilience to extreme weather) should be added. (Survey-based measures have proven net-rewarding to DNOs in ED2 while hard reliability data has been net-penalising. The question is whether to recalibrate.)

Connections and network capacity

How the price control framework should treat connection delivery, anticipatory investment, and capacity release. (Connection queues are the binary constraint on electrification. A price control that funds reactive build-out will deliver the same queues that ED2 has produced. A price control that funds anticipatory capacity transfers forecast risk to consumers but unblocks the queue.)

Flexibility and the distribution system operator role

Whether DNOs should be funded and incentivised to develop DSO functions, including flexibility procurement, real-time visibility, and active network management. (The substantive question is whether the same entity should own the wires and procure the services that substitute for new wires. The conflict of interest is structural.)

Innovation and emerging technology

How innovation funding should be structured (the Network Innovation Allowance, Strategic Innovation Fund, or successor mechanisms), and how proven innovations should transition into business-as-usual allowances. (Past RIIO controls have funded innovation that never made it into the baseline. The question is whether ED3 closes the loop.)

Cost of capital and financeability

How the cost of equity, cost of debt, gearing assumptions and financeability tests should be set for ED3. (Where the most consumer money moves. A 50 bps shift on the RAV is around £200 million a year.)

Whole-system coordination

How the ED3 framework should interact with the ET3 transmission price control, the NESO transition, and the Strategic Spatial Energy Plan. (Whether ED3 is set inside a coherent whole-system framework or as a standalone DNO control with cross-references.)

Customer engagement and the business plan process

How DNOs should engage customers in their Business Plans, and what role Customer Engagement Groups, RIIO-ED3 Customer Engagement Groups, or successor bodies should play. (Customer engagement has become a compliance exercise that scores well on subjective incentives. The question is whether ED3 makes it materially shape the plan.)

Environmental performance and net zero alignment

How environmental outputs should be incentivised, including scope 1, 2 and 3 emissions, network losses, and contribution to wider net zero objectives. (Network losses are a real consumer cost and a real emissions source. Scope 3 reporting is largely a disclosure exercise.)

Sector-wide issues

Workforce, skills, supply chain, and resilience to physical and cyber threats. (Important, but unlikely to be where the framework choices bite hardest.)

The main PDF contains the specific consultation questions under each theme. Anyone preparing a substantive response will need to work from that document rather than the page summary.

How to respond

Closed on 16 January 2025 (the page text mentions both 15 and 16 January, the formal closed date is 16 January). Responses were sent to RIIO3@ofgem.gov.uk. The Framework decision has since been published and is the operative document. Responses to the consultation are available as a ZIP file from the Ofgem publication page. For anyone tracking the next stage, the Sector Specific Methodology consultation is the next decision point in the ED3 sequence and is where the framework choices begin to acquire numbers.