My Lords, I thank the noble Lord, Lord Whitty, and the noble Baroness, Lady Worthington, for tabling these amendments, which highlight the important role that the distribution network operators play in our electricity system, including in supporting electricity demand reduction. Amendment 52B seeks to ensure that distribution network operators take account of government policy as set out in Clause 5. Amendment 55ZZC would insert a requirement in Clause 37 for the Secretary of State to take account of the role of distribution network operators in a pilot scheme to permanently reduce electricity use.
Ofgem regulates through a licensing system and electricity distribution network operators need to obtain licences from Ofgem to participate in the energy market. An important aspect of this system is Ofgem’s power to set regulatory price controls, and its price control framework. This, as the noble Lord pointed out, is known as RIIO, and is well aligned with the Government’s energy policy, including the requirement for network companies to invest efficiently to ensure continued safe and reliable services, to innovate to reduce network costs for current and future consumers, and to play a full role in delivering a low-carbon economy and wider environmental objectives.
As we have previously debated, the Government are providing even greater clarity, as Clauses 119 to 126 will enable the Secretary of State to introduce a new strategy and policy statement for Ofgem to help improve alignment with government policies. In addition, my department works closely with DNOs and the wider industry, through groups such as the Smart Grid Forum, to satisfy ourselves that strategic investment decisions are being made.
On the specific issue of efficiency and reducing demand, DNOs have a licence condition on them to
reduce losses, and they have been required to set out in their business plans how they will reduce losses, and to publish annual reports on what loss reductions they planned and what they actually achieved. A discretionary reward of up to £32 million will be made available by Ofgem, over the price control period, for efficient and innovative loss reduction initiatives.
In future price control reviews, when more reliable data may be available through smart meters and smart grid technology on the networks, Ofgem expects to introduce further incentives. Furthermore, Ofgem has recently extended the scope of its Low Carbon Network Fund to enable DNOs to carry out electricity demand reduction projects, which will complement the Government’s larger-scale pilot.
To reiterate the points made in our earlier debate on the electricity demand reduction pilot, while I support the noble Lord’s aim of ensuring that we test variations of the key elements associated with demand reduction projects, the Secretary of State already has the ability to design and run a pilot—or pilots—to test different approaches.
Clause 37, as I said earlier, is simply a spending power; it authorises the spending of money for EDR pilots. Our intention is design the pilot in a way that encourages projects to be delivered by a variety of organisations, including DNOs, provided the projects meet the criteria that we develop.
The noble Lord, Lord Whitty, asked why we cannot deliver eight year-old DNO plans without details under EMR. We have set out clear policy intentions—for instance in the renewables road map published last year, and in our various announcements on EMR—to move to a low-carbon energy mix. This informs the development of the DNO plans.
The noble Lord also asked why we had moved to an eight-year period. This was to encourage DNOs to work more strategically and to invest over a longer term, instead of making short-term investment decisions.
I hope the noble Lord is reassured that I recognise the important role that DNOs are already able to play in helping to realise reductions in electricity use. I hope that on that basis he feels able to withdraw his amendment.