Ofgem sets framework for next phase of electricity network investment

Ofgem has published the rules that will guide how Britain’s electricity distribution networks plan and deliver investment between 2028 and 2033, setting out a tougher approach to cost control while supporting the expansion needed for a more electrified economy.

The regulator’s Sector Specific Methodology Decision (SSMD) establishes the framework that the country’s five electricity distribution network operators (DNOs) must follow when preparing their business plans for the next regulatory period, known as ED3.

The decision comes at a pivotal time for the energy sector, with growing demand expected from electric vehicles, heat pumps, battery storage and other low-carbon technologies. However, Ofgem has stressed that uncertainty around where and when demand will emerge means investment must be carefully targeted and justified.

Under the new framework, network operators will be required to provide stronger evidence that proposed infrastructure projects are necessary and demonstrate that alternative solutions have been fully explored before seeking approval for major capital expenditure.

The regulator has adopted what it describes as a “build and flex” approach, requiring companies to maximise the use of existing network capacity through smart technologies and flexible demand management before pursuing costly network reinforcements.

This could include greater use of smart electric vehicle charging, demand-side response programmes, battery storage systems and controlled electricity exports to reduce pressure on the grid and defer the need for new infrastructure.

The rules also introduce tighter controls on spending and stronger oversight of delivery performance. Network operators will face increased scrutiny over project costs and timelines, with mechanisms allowing investment to be accelerated, delayed or adjusted as future demand becomes clearer.

Consumer protection has been placed at the centre of the framework, with Ofgem seeking to avoid customers paying upfront for infrastructure that may not ultimately be required. Distribution companies will also be expected to improve support for vulnerable customers, strengthen responses to power outages and provide more robust delivery plans.

Financial incentives and penalties will play a greater role under the new arrangements, with rewards for strong performance and consequences for companies that fail to deliver against agreed commitments. Enhanced reporting requirements and performance benchmarking are also intended to improve transparency and accountability.

The framework includes measures aimed at speeding up grid connections for both small-scale technologies, such as domestic solar panels and electric vehicle chargers, and larger commercial, industrial and housing developments. Companies that fail to meet connection targets could face financial penalties, while strong performers may receive rewards.

Steve McMahon, Ofgem’s Director of Network Price Controls, 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 publication does not set funding levels, company revenues or the financial rewards and penalties that will apply during the next regulatory period. Those details will be determined following the submission and assessment of business plans from the five DNOs, which collectively operate across 14 licence areas serving around 30 million customers.

The companies must submit their plans by December 2026. Ofgem will publish draft determinations in summer 2027, with final decisions expected by the end of that year. The new ED3 price control period is scheduled to begin on 1 April 2028.

The framework represents a significant step in shaping how Britain’s electricity networks prepare for the transition to a low-carbon economy while balancing the need for investment against the cost burden on consumers.