RIIO and the rewards of measuring network risk

Jonathan Booth

Jonathan Booth of Electricity North West explores RIIO’s impact on risk management

From an asset management perspective, DNOs have reason to be hopeful about the effects of the new RIIO price control framework.

Previous price control models tended to emphasise specific metrics such as network outages and customer disruption – often at the expense of a more holistic approach. Efficiency measurement was all about the short-term too.

As a result, DNOs often found themselves in a position where good asset management practice pointed in one direction, while price control requirements pointed in the other. As an unintended consequence, the incentive was often to focus on quick fixes at the expense of overall network health.

RIIO promises a more mature approach, encouraging DNOs to take a much longer-term view. For example:
• The regulatory cycle has been lengthened from five years to eight, requiring more extensive planning.
• Asset depreciation life has been increased from 20 years to 45, releasing return on investment more slowly.
• Greater tolerance for OPEX makes it more worthwhile to maintain assets instead of replacing them.

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However, this new long-term approach also creates new challenges – especially in terms of managing risk. We need to find better ways to measure and quantify asset-related risks in order to make better decisions about where and how to invest.

Some of the groundwork has already been laid: Ofgem’s new risk measurement framework, developed with the DNOs and released in January 2013, provides a “common language and currency” that all DNOs can use to standardise their strategic management of network risk.

Putting this framework to practical use is still a challenge, because it needs to be calibrated to each DNO’s business objectives, risk appetites, cost structures and asset base. Nevertheless, at Electricity North West, our initial implementation has been a fruitful exercise, and is starting to change the way we think about assets and risk.

For example, one major theme has been the importance of the relationship between assets. Traditionally, this has been the concern of control engineers, who focus on maintaining service levels across the network as a whole. On the other hand, the condition of individual assets has been the concern of maintenance teams, who may understand everything about a particular piece or type of equipment, but not the role that it performs in the context of the network.

What has become clear is that both condition data and dependency data are vital in forming a complete picture of asset-related risk. If you don’t know the condition of an asset, you can’t judge how likely it is to fail; and if you don’t know what relationship it has with other assets, you can’t judge how serious that failure will be. Putting systems and processes in place to unite and analyse these two types of asset data is going to be critical for DNOs over the next few years.

Everything flows from this. A holistic analysis of assets and their relationships will enable more accurate measurement of network risk; in turn, this will provide a firm, evidential basis for making investment decisions. And by investing in long-term network health, DNOs will be able to unlock the full benefits that RIIO has to offer.

Jonathan was one of the speakers at our recent event, Enabling the Advanced Asset – Asset, Data and Work. His presentation can be viewed here »

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