RIIO-3: Ofgem's Final Determinations at a glance

On 4 December 2025, Ofgem published its Final Determinations for the electricity and gas transmission and gas distribution price controls for the period from 1 April 2026 to 31 March 2031 (RIIO-3). The Final Determinations set out the funding and performance rules that will apply to network operators in the electricity and gas transmission and gas distribution sectors from April 2026 to March 2031.

What you need to know

• The Final Determinations define the outputs that network operators will be required to deliver and the revenues they will be permitted to recover from their regulated services. Under the framework, Ofgem has approved £28.1 billion of upfront funding for investment, within a wider investment pipeline of around £90 billion over the RIIO-3 period.

• Ofgem has also published its consultation on the proposed licence modifications to give effect to the Final Determinations and plans to issue its final licence modification decision in February 2026 after the consultation closes on 16 January 2026. Network operators will then have 20 working days to appeal the Ofgem's decision to the Competition and Markets Authority (CMA), should they wish to do so.

RIIO-3 is the latest development in Ofgem's RIIO price control framework and replaces the current price controls (known as RIIO-2) which expire on 31 March 2026. The Final Determinations apply to the following network monopolies:

• Electricity transmission (ET): National Grid Electricity Transmission, Scottish Power Transmission, Scottish Hydro Electric Transmission.

• Gas transmission (GT): National Gas Transmission.

• Gas distribution (GD): Cadent, Northern Gas Networks, SGN, and Wales & West Utilities.

The price control for electricity distribution companies will be determined in two years' time by a set of separate price control decisions (RIIO-ED3) which will apply for the period starting in April 2028.

The RIIO framework

Ofgem (Great Britain's independent energy regulator) sets price controls with a view to ensuring that the energy network companies (which are essentially monopolies) charge fair prices, operate efficiently, treat customers fairly, invest in improving their service and support the move to low carbon energy.

For the last 13 years, Ofgem's energy network price controls have been known as RIIO (Revenue = Incentives + Innovation + Outputs). Prior to the beginning of a price control period, Ofgem determines the allowed revenues for each energy network company upfront which may be subject to adjustments in certain circumstances. Energy network companies then finance themselves and put in place plans to deliver their investment programme over the price control period, within or below the budget that Ofgem allows. Any over- or under-spend against the allowances is shared between the network companies and consumers (indirectly through the charges energy suppliers levy on consumers which are passed on to the network companies through their network charges).

The first set of RIIO price controls (RIIO-1) ran from 2013 to 2023 (2015 to 2023 for electricity distribution). The second (RIIO-2) ran from 2021 to 2026 (2023 to 2028 for electricity distribution). The next price control period (RIIO-3) for gas and electricity transmission and gas distribution will run from 2026 to 2031. For electricity distribution, the period (ED3) will run from 2028 to 2033. 

At a high level, RIIO-3 is designed to:

• set a financial framework that delivers on investment whilst protecting consumers from excessive costs: the Final Determinations approved £28.1 billion of upfront investment (i.e. upfront total expenditure (totex) by the energy network companies into the energy network), within a potential wider investment pipeline of c. £90 billion over the RIIO-3 period.
• encourage efficiency across network operations: for example, a 1% annual targeted cost reduction against the baseline totex to reflect ongoing efficiency challenges is applied across all network sectors.
• set outputs and incentives, including by using output measures, price control deliverables and other incentives to reward or penalise networks for outperformance or underperformance.

Ofgem's RIIO-3 package is structured around three linked pillars: (i) outputs to be delivered (ii) expenditure allowances and (iii) uncertainty and other risk mitigating mechanisms.

Pillar 1: Outputs and incentives

Outputs are the activities and outcomes that the energy network companies should deliver for customers during the RIIO-3 period. This includes output delivery incentives, price control deliverables, and licence obligations, as well as statutory obligations and ongoing efficiency improvements.

• Output delivery incentives measure network companies’ performance against defined output targets. Where performance improves beyond the target, companies can earn rewards; whereas if performance falls below the target, penalties may apply. Output delivery incentives can be linked to either a financial or reputation incentive to drive performance.

• Price control deliverables allow Ofgem to return money to consumers if an output is not delivered. 

• Licence obligations reflect the minimum standards expected of the network company. If the company fails to meet these standards, they may face formal enforcement action from Ofgem.

Pillar 2: Expenditure allowances

Expenditure allowances enable network companies to recover the costs of delivering the outputs which are required by Ofgem. This includes:

• Baseline totex allowances which seek to ensure that the network company has sufficient, but not excessive funding to deliver its outputs and other deliverables over the control period. These are determined by Ofgem's estimate of what a notional efficient company would need to deliver the relevant outputs. 

• Ongoing efficiency challenge which is a productivity target (set at 1% per annum against the baseline totex in RIIO-3), applied as a post-modelling adjustment by Ofgem. This is intended to incentivise continuous improvement amongst the network companies. 

• Real price effects indexation which is a mechanism to adjust revenues to reflect changes in input prices (e.g. changes in the cost of labour and materials) experienced by the network companies over the price control period.

• Business plan incentives which reward the network companies whose business plans are found to represent additional value-for-money compared to business-as-usual and provide information that helps Ofgem to set the price control.

Uncertainty and other risk mitigation mechanisms are employed to manage and maintain a balance of risk between consumers and the network companies. These include:

• Totex incentive mechanisms which are mechanisms through which over- or underspend incurred against baseline allowances is shared between each network company and consumers.
• Uncertainty mechanisms are used by Ofgem to adjust allowances during the price control period to account for costs which could not be forecast accurately at the time of setting the price control.

Under RIIO-3, Ofgem has approved £28.1 billion of upfront investment across the price controls. This is a 16% increase from Ofgem's Draft Determinations, due to new evidence from the network companies and updated modelling. Ofgem has also signalled a wider investment pipeline of around £90 billion that may be delivered over the RIIO-3 period. By comparison, Ofgem approved around £30 billion of upfront funding under RIIO-2. 

Due to the increased investment required during RIIO-3, network charges on household bills are expected to rise by around £108 by 2031. However, this is expected to be mostly offset by various efficiency savings, meaning that net costs are expected to be around £30 a year higher.  

Ofgem has set a 1% annual ongoing efficiency challenge across all sectors, based on its assessment of productivity potential for the energy network companies. This productivity potential is expected to be driven by increasing adoption and usage of data, digitisation, and AI, to drive efficiency improvements across various elements of network operations. This compares to the ongoing efficiency challenge of 1.2% per year set in RIIO-2.

The financial framework set out in Ofgem's Final Determinations is designed to ensure that network companies can finance their activities and attract investment. For the investors financing the network companies, RIIO-3 contains positive developments compared to RIIO-2 as it increases debt and equity costs. However, the allowed cost of equity remains below the levels sought by the network companies:

• For RIIO-3, Ofgem has set the allowed return on equity at 6.12% for gas transmission and 5.70% for electricity transmission, an increase that in part recognises that interest rates have risen since it set the RIIO-2 price controls.

• Ofgem set debt allowances across each sector with allowances ranging between 4.67% and 6.16%. Ofgem also implemented a semi-nominal debt allowance to protect consumers from inflation shocks, whereas previously this was fixed fully in real terms.

• Bringing together its cost of equity and debt allowances, Ofgem set the weighted average cost of capital at 5.24% for gas transmission and distribution and 5.49% to 5.73% for electricity transmission (the sector unweighted average is 5.62%). This compares to the much lower weighted average cost of capital of 2.81% determined in RIIO-2. The higher allowances for electricity than gas reflect the higher cost of new debt to historic debt and the much greater issuance of new debt in electricity transmission owing to the size of the capital programmes. 

Statutory Consultation

On 16 December 2025, Ofgem published its statutory consultation on the proposed licence modifications to bring into effect the decisions made in the Final Determinations. The consultation runs until 16 January 2026. 

Next steps

Following the expiry of the statutory consultation, Ofgem expects to publish its final decisions on licence modifications in February 2026, with the new regime coming into effect on 1 April 2026. 

The network companies will be closely considering their positions, as well as preparing their responses to the licence modification consultation. Licence holders may appeal Ofgem's decision to the CMA. Applications for permission to appeal must be made within 20 working days of the publication of Ofgem's licence modification decision. Ofgem has however stated (reflecting prior CMA comments) that it expects prospective appellants to first engage with Ofgem to indicate their intention to appeal. Ofgem suggests that prospective appellants should send pre action correspondence to Ofgem between early December 2025 and mid January 2026. The pre-action correspondence should: identify the specific RIIO-3 elements to be appealed; define the scope; set out the alleged errors; and explain why the decision is wrong.

Whether energy network companies will appeal Ofgem's decision, and on what grounds, remains uncertain. In RIIO‑2, nine companies brought CMA appeals; common issues included the cost of equity and ongoing efficiency challenge. These matters may well also be contested in RIIO‑3.

Other authors: Lyudmyla Bashynska, Senior Associate and Jack Haile, Competition Economist