REG - OFGEM - OFGEM SETS RULES FOR 2028-2033 GRID INVESTMENT

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RNS Number : 1535F  OFGEM  21 May 2026

OFGEM SETS RULES FOR 2028-2033 GRID INVESTMENT TO MEET GROWING ELECTRICITY
DEMAND

·      Final ED3 methodology sets out how distribution grids investment
will keep pace with rising electricity demand between 2028 and 2033

·      Britain's five distribution network operators (DNOs) will face
strengthened cost controls, clearer public accountability and financial
penalties if they fail to meet expectations

·      Tight cost controls to be put in place, unlocking grid investment
only where electricity demand is clear and needed, with networks required to
maximise existing grid capacity first

·      New requirements strengthen protections for vulnerable consumers
and block unnecessary or inefficient costs being passed onto bills.

Ofgem has today (Thursday 21(st) May) set out a challenging but fair rulebook
for assessing investment plans and controlling costs for Britain's regional
and local electricity distribution grid into the 2030s.

The Sector Specific Methodology Decision (SSMD)
(https://www.ofgem.gov.uk/consultation/sector-specific-methodology-consultation-electricity-distribution-price-control-ed3)
sets out the rules for how networks should keep pace with projected
electricity demand across the economy - and tells the five DNOs how their
2028-2033 business plans will be assessed
(https://www.ofgem.gov.uk/publications/business-plan-guidance-electricity-distribution-price-control-ed3)
once they are submitted in December.

The full Electricity Distribution Price Control (ED3) settlement, to be
approved by the end of 2027, will map out each company's financial settlement
over the five-year price control period.

The SSMD judges that while demand on distribution grids will rise, uncertainty
in the scale, timing and location of electrification requires a more phased
approach for network investment.

This updates Ofgem's consultation position last November
(https://www.ofgem.gov.uk/consultation/sector-specific-methodology-consultation-electricity-distribution-price-control-ed3)
so it now requires DNOs to demonstrate that investment is highly likely to be
needed, even after flexible technologies are deployed to maximise existing
grid capacity. It means network companies must show projects will meet
expended demand growth and prevent grid bottlenecks.

The five-year period is a critical stage for the unprecedented grid investment
needed to expand the existing 800,000 kilometres of networks which connects 30
million customers - with planning on projected demand based on detailed
analysis including NESO's transitional Regional Energy Strategic Plan
published in January 2026.
(https://www.neso.energy/what-we-do/strategic-planning/regional-energy-strategic-planning-resp/transitional-regional-energy-strategic-plan-tresp)

The SSMD sets out key principles:

 

·    Tighter rules on baseline capital: ED3 will set the networks'
baseline allowances from 2028 onwards for essential investment in grid
capacity and resilience. This will come with clear conditions on delivery;
strict cost of capital rules set in line with market conditions; and networks'
revenues set in line with performance and consumer service delivery.

·    Stricter cost controls to manage uncertainty: DNO's capital will be
tightly controlled through strong evidence thresholds and in‑period
adjustments, allowing costs to be approved, increased or deferred as demand
materialises.

·    'Build and flex' as the default: networks will be required to
maximise existing grid capacity using smart, flexible demand management - with
investment signed-off for new build when the economic need is clear and
sustained. SSMD requires networks to use tools like smart EV charging,
demand-side response, battery storage and controlled exports to shift demand
and reduce network constraints.

 

·    Stronger consumer protection: tighter cost controls designed to
prevent unnecessary, excessive or speculative upfront investment being
recovered through bills. It will minimise costs for consumers while ensuring
new infrastructure is delivered on time and in line with demand. DNOs will be
required to improve the identification of vulnerable customers, submit more
robust delivery plans, strengthen their power cut response and tighter
accountability, enforced by financial rewards and penalties.

·    Financial rewards and penalties: ED3 will build in stronger
incentives, penalties and clawbacks to drive good performance. There will be
greater scrutiny of network companies, with clear financial consequences for
failing to meet their business plan commitments. This includes standardised
reporting, performance dashboards and comparative data to ensure companies are
transparent, benchmarked and accountable.

·    Faster grid connections with stronger enforcement: strengthened rules
to accelerate connections for low carbon technologies and major projects with
financial penalties for delays and underperformance and rewards for DNOs that
can deliver great service. This covers connections from low-voltage,
high-volume assets like EV charge points or rooftop solar to large-scale,
complex grid connections for housing, commercial and industry.

Ofgem Director of Network Price Controls Steve McMahon said:

"We know electrification across the economy will drive unprecedented demand
but its precise pace, scale and location remain uncertain. Our rulebook
strikes a tough but fair balance in expanding grid capacity to meet the
demands placed on them. It ensures investment is targeted, justified and
delivers value for money - that's why we're putting strong controls in place
to protect consumers from projects that are not delivered on time and on
budget.

"The 'build and flex' model is a critical evolution of our approach. We will
sign-off new investment only where the strategic need is clear and networks
have maximised existing grid capacity to control demand using smart, flexible
grid technology. This blocks unnecessary physical upgrades and reinforcements
based on speculative forecasts being recouped prematurely from bills. It gives
networks and investors a robust, transparent and predictable rulebook that
targets capital when and where needed.

"There is no short cut to securing the investment needed to support
electrification and there are tough decisions ahead. We now have 18 months to
get this right working with all the networks; the UK, Scottish and Welsh
governments; key sectors across the economy and consumer bodies".

The SSMD includes no assessment of the overall investment, allowed revenues,
financial penalties or rewards - and their projected impact on customer bills.

The five DNOs' business plans for 2028 to 2033, covering 14 licence areas
across Britain, must be submitted in December this year. Ofgem's draft
determinations will be made next summer with the final decision for each
company made by the end of 2027, including the projected cost impact on
consumers. The new price control period starts on 1(st) April 2028.

Notes to Editors

(a)  ED3 is Ofgem's next price control period for Britain's electricity
distribution networks, running from 2028 to 2033. The ED3 Framework
(https://www.ofgem.gov.uk/decision/framework-decision-electricity-distribution-price-control-ed3)
was published in April 2025 and the Sector Specific Methodology Consultation
(https://www.ofgem.gov.uk/consultation/sector-specific-methodology-consultation-electricity-distribution-price-control-ed3)
was published in October 2025 with the final methodology
(https://www.ofgem.gov.uk/consultation/sector-specific-methodology-consultation-electricity-distribution-price-control-ed3)
and business plan guidance
(https://www.ofgem.gov.uk/publications/business-plan-guidance-electricity-distribution-price-control-ed3)
published today.

These set the rules for local power networks funding, how much they can earn
and how they must perform. It determines how network companies plan and
deliver investment to support rising electricity demand while controlling
costs, so consumers pay only for infrastructure that is necessary and
efficiently delivered.

(b)  The five electricity distribution network operaters control 14 regional
licence areas across Britain: UK Power Networks, National Grid Electricity
Distribution; Scottish and Southern Electricity Networks; SP Energy Networks
and Northern Powergrid. Britain's electricity distribution network spans more
than 800,000 kms in cabling, hundreds of thousands of substations and millions
of network assets, like connections, reinforcements and distributed energy
generation and batteries.

NESO's transitional Regional Energy Strategic Plan
(https://www.neso.energy/what-we-do/strategic-planning/regional-energy-strategic-planning-resp/transitional-regional-energy-strategic-plan-tresp)
, published in January 2026, sets out assumptions for planning electricity
distribution grids to meet increased electricity demand in the next 10 years

(c)  The Sector Specific Methodology Decision (SSMD)'s headlines for the ED3
price control period 2028 to 2033 include:

·      A stronger, more disciplined price control to protect consumers:
ED3 significantly strengthens Ofgem's cost assessment, requiring DNOs to
justify all proposed expenditure against robust engineering evidence and
benchmarking before funding is approved. Baseline total expenditure (totex)
allowances will be set conservatively, with ongoing scrutiny through annual
reporting and licence obligations to ensure delivery. This framework is
designed to ensure consumers only pay for investment that is necessary,
efficient and deliverable, not speculative or premature.

·      A new adaptive funding model to better reflect economic
conditions and pressure on bills: ED3 adopts a hybrid approach, combining
upfront funding for low-risk, high‑confidence projects with in‑period
"uncertainty mechanisms", such as volume drivers, reopeners and pass‑through
costs to adjust revenues as demand materialises. These tools allow Ofgem to
release additional funding only when there is clear evidence of need, avoiding
over‑building and over‑funding upfront. This ensures network investment
meets demand and aligns with real system requirements, protecting consumers
from paying too early.

·      Clear public accountability: Funding approvals will be tied to
clear outputs through price control deliverables, volume measures and
output‑based metrics, with requirements to deliver or return revenue.
Companies that fail to deliver funded outputs face clawback and potentially
penalties, ensuring a direct link between funding and outcomes. This marks a
step change in accountability, with ED3 ensuring that capital is only retained
where delivery is achieved in full.

·      Balanced incentives to control profits and prevent windfalls: ED3
anchors revenues in baseline allowances for efficient totex and an allowed
cost of capital in line with market conditions with additional returns earned
through performance-linked output delivery incentives and totex efficiency.
Financial exposure is tightly constrained through caps and collars, with new
measures to protect consumers from the risks of high inflation. Together with
in-period tools such as volume drivers and reopeners, this ensures profits
remain contingent on delivery and tightly controlled in the interests of
affordability and value for money.

·      A step change in connections performance for households and
industry: ED3 introduces a new "upgrades and access incentive" for smaller
connections, targeting faster approvals for low‑carbon technologies such as
EV chargers and heat pumps, including a 24‑hour approval metric for
straightforward cases. For larger connections, a strengthened incentive
framework and end‑to‑end monitoring will hold DNOs accountable for
timeliness, quality and project delivery. This is underpinned by greater
transparency with DNO producing a robust connections strategy and annual
report.

·      A new 'build and flex' approach to minimise costs: DNOs will be
required to prioritise flexibility and demand‑side solutions to shift and
manage demand so the existing network capacity is maximised before investing
in physical upgrades, reinforcements and building. This reflects that
traditional infrastructure projects are capital‑intensive, while flexibility
can deliver capacity more efficiently and at lower cost to consumers. Ofgem
will enforce this through business plan assessment and regulatory tools,
ensuring new build only proceeds where constraints are persistent and demand
is sufficiently certain.

·      Greater transparency, scrutiny and reputational accountability:
ED3 introduces greater transparency, accountability and visibility of
underperformance. There will be strengthened reporting requirements
scrutinising network companies against their business plans and investment
recouped from consumers. This regime includes strengthened Environmental
Action Plans, Annual Environmental Reports and Annual Vulnerability Report. It
will include standardised performance dashboards, comparative performance
tables (published by Ofgem) and customer satisfaction surveys. Independent
stakeholder groups and consumer research will also play a central role in
ongoing scrutiny of delivery and value for money.

·      A stable, investable framework aligned to long‑term demand
growth: ED3 will provide a solid strategic planning regime, with NESO's
transitional regional energy strategic plans as the basis for DNO's
long‑term strategies. This gives investors clarity while requiring network
companies to produce credible, evidence‑based business plans aligned to
future electricity demand. The framework supports a scalable pathway for
investment, ensuring networks can expand capacity at pace as electrification
accelerates.

·      Stronger protections for vulnerable consumers and system
resilience: ED3 will require DNOs to strengthen consumer protection: expanding
reach, data accuracy and tailored support via Priority Services Registers
(PSR); submitting enhanced Annual Vulnerability Reports; targeted response
plans for storms and extreme weather events; scaling up support for vulnerable
consumers during power cuts. This is all underpinned by performance-linked
financial incentives and penalties based on PSR coverage; social value
delivery, consumer satisfaction as well as specific performance metrics for
DNOs' response to outages.

 

 

 

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