The term RIIO stands for Revenues = Incentives + Innovation + Outputs and is the approach used by the energy regulator in GB to ensuring that the monopoly companies who run gas and electricity have enough revenue to run an efficient network that will deliver what customers need. In December 2019, the Transmission and Gas Distribution network companies and the Electricity System Operator submitted business plans proposing their expenditure for RIIO-2, and the regulator has now assessed these and is consulting until 4 September on their Draft Determinations for the company allowances. The Ofgem Final Determination will follow at the end of the year.
Within the methodology underpinning the whole price control, is a requirement for companies to plan for a resilient workforce that is fit for the future. Ofgem has stated that the core business plans must deliver a “modern, diverse, high quality, well-trained, resilient workforce within their baseline regulatory settlement”. It is therefore incumbent on every company submitting a business plan to the regulator to have researched their workforce needs and reached a state of confidence that they can deliver this aim without “any additional funding or incentives”.
In the period leading up to the business plans submissions, Ofgem stated repeatedly that it recognised the challenge faced by companies in attracting, developing and retaining the skilled workforce they need from what was a highly constrained labour market. The regulator set out that they wished to see the labour force maintained and human capital kept in the industry, and ensuring workforce resilience and doing the necessary planning to achieve workforce sustainability is the responsibility of individual companies to manage as part of strategic plans within their “business as usual activity”. All in the energy industry involved recognised that failure to invest in these skills could ultimately result in the system becoming less reliable and more costly to operate in the future.
With this guidance in place, regulated energy companies were asked to build their approach to ensure they are maintaining and sustaining the workforce and skills they need to operate effectively. To the extent that the regulator considers these to be proportionate and efficient with robust evidence and justification, funding to deliver this would be provided as part of normal price control revenues.
Where specific labour market risks from business challenges or extraneous factors were faced, companies were advised they should be able to demonstrate the evidence for their assessments and the mitigation measures proposed. This included for the indirect workforce (the supply chain) where it involved delivering the company’s core obligations and service. Within the utility regulatory regime, companies can structure their business to outsource as much or as little of the construction and operations as they wish, but they do remain fully accountable for the outcomes that result and for meeting their licensed obligations. The high performing companies therefore think for the sustainability and resilience of their supply chain as a matter of good business.
For companies, the process of designing the workforce plan is intensive. Workforce planning is a long-term endeavour and workforce strategies must not only cover the period of RIIO-2, but then extend out to consider workforce resilience over the longer term. Where this involves considering recruiting increased numbers over and above those required to operate efficiently in the shorter term (e.g. additional apprenticeships / technical graduates) they are required to clearly evidence the longer-term benefits they see. Ofgem has stated in its consultation meetings that it will listen carefully to such resilience planning, and in its December 2018 proposals, suggested that plans submitted “should extend beyond the 5-year time horizon of RIIO-2, covering both direct labour and the supply chain.” They also suggested that “these plans look to improve workforce diversity, promote multi-skilling and increased productivity, and reflect more advanced technology skills needed to support the energy system transition.”
Energy & Utility Skills Chief Executive Nick Ellins advised “The RIIO2 price control is structured around ensuring future resilience and affordability. Resilience of the energy system is defined as not just about energy assets, but also about having the human capital and sustainable pipeline of technical skills in place to maintain the level of service customers expect over the longer term. Ensuring a resilient energy workforce is integral to not just the companies delivery, but ultimately to the strategic success of Ofgem, BEIS and the devolved nations in delivering services for existing consumers, and safeguarding the reliability of the network infrastructure and systems for future consumers.”
“Energy & Utility Skills raised the need for workforce resilience within the initial regulatory framework proposals and then responded to the initial Ofgem RIIO-2 consultation process, fully supporting the proposals to explicitly include workforce resilience as a requirement within the final RIIO-2 approach and business plans. We were very pleased that the economic regulator then asked our National Skills Academy for Power to form a RIIO2 Workforce Resilience Task & Finish Group and convene the relevant gas and power companies to conclude an optimum approach. This involved close collaboration with our partners in the GMB, Prospect, Unite and UNISON unions. It is important that the Final Determination now ensures that this collective agreement around the criticality of workforce resilience is enshrined, and our most important energy assets – its people – stay at the very centre of RIIO-2.”
This link is to the latest RIIO2 Draft Determination Core Document and is supplemented by the presentation and transcript used by Ofgem with the investors in the sector.
The decisions regarding the workforce are contained within the RIIO-2 Business Plan Guidance and RIIO-2 Sector Specific Methodology Decision