In short
The network companies are monopolies, so Ofgem limits what they can earn. Every five years or so it sets a price control: how much each company can spend, the return it can make, and what it must deliver. The framework is called RIIO, short for Revenue = Incentives + Innovation + Outputs. The money is recovered from everyone's electricity bills through network charges.
Which price controls apply
- RIIO-ED2 covers the 14 distribution networks from 1 April 2023 to 31 March 2028.
- RIIO-T3 covers the three onshore electricity transmission owners (and gas transmission) from 1 April 2026 to 31 March 2031. Ofgem published its final determinations in December 2025.
- RIIO-ED3 is the next distribution price control, due to start on 1 April 2028. Ofgem is developing it now.
Northern Ireland is separate: the Utility Regulator sets NIE Networks' price controls, known as RP periods. See the policy timeline for the key dates.
How a price control is set
- Framework. Ofgem consults on the overall approach: the length of the period, the main outputs and how incentives will work.
- Methodology. It sets detailed rules for each sector, such as how costs will be assessed and how the allowed return is calculated.
- Business plans. Each company submits a plan with its proposed spending and outputs, tested with customers and an independent challenge group.
- Draft determinations. Ofgem publishes its proposed allowances, usually cutting the companies' requests.
- Final determinations. After consultation, Ofgem sets the final allowances and licence conditions.
- Appeals. Companies can appeal to the Competition and Markets Authority (CMA) if they think Ofgem has made an error.
The whole process takes around three years, so work on one price control starts long before the previous one ends.
How the money works
Totex and sharing
Ofgem sets an allowance for total expenditure (totex), covering both operating and capital costs. If a company spends less than its allowance while still delivering its outputs, it keeps a share of the saving and customers get the rest. If it overspends, the cost is shared the same way. This "totex incentive" is meant to reward efficiency without favouring capital over operating spend.
The regulatory asset value
Most spending isn't recovered from bills straight away. It's added to the company's regulatory asset value (RAV) and recovered over decades, like a mortgage. Each year, the company earns a return on the RAV and recovers a slice of it through depreciation.
The allowed return
The return on the RAV reflects Ofgem's estimate of the cost of capital: the cost of debt plus a return on equity for shareholders. Small changes in the allowed return make a big difference to bills and to investors, so it's usually the most argued-over part of a price control.
Incentives
Companies earn rewards or penalties for performance on outputs such as power cuts, customer satisfaction, connection times and, for DNOs, their DSO role. These are known as output delivery incentives.
Handling uncertainty
Nobody knows exactly how much network will be needed over five years, especially with rising demand from heat pumps, electric vehicles and data centres. RIIO uses uncertainty mechanisms to adjust allowances during the period:
- Volume drivers automatically add funding when activity rises, for example for more low-voltage reinforcement.
- Re-openers let a company apply for extra funding when a need becomes clear, such as a large new connection or a net zero project.
- Pass-through items, such as business rates, are passed on at cost.
For large transmission projects, Ofgem created the Accelerated Strategic Transmission Investment (ASTI) framework in 2022. It funds the projects needed for 2030 offshore wind targets outside the normal price control cycle, so construction isn't held up waiting for a determination. See transmission network build.
What to watch in RIIO-ED3
ED3 will cover the period when demand on local networks is expected to grow fastest. The main questions include:
- how much distribution companies should invest ahead of need, rather than waiting for demand to appear;
- how their plans link to NESO's Regional Energy Strategic Plans;
- how connections and DSO performance are measured and rewarded;
- the allowed return, given higher interest rates than in earlier periods;
- the effect on bills, which Ofgem has to weigh against the cost of networks not being ready.
Follow RIIO price controls for Ofgem's decisions as they are published.
Sources
Based on Ofgem's published RIIO framework, methodology and determination documents. Figures and dates change as decisions are made, so check Ofgem's website for the current position.
Follow the news
Latest stories on RIIO Price Controls, Network Charging. For terms, see the glossary; for key dates, the policy timeline.