In 2010, Ofgem, the British Office of Gas and Electricity Markets introduced RIIO (Revenues = incentives, innovation and output) a new price control framework for UK energy companies designed to meet the challenges facing the energy sector.
In the framework of a Capstone programme, six students from the London School of Economics (Master’s degree in Public Administration) assessed the impact of RIIO on the credit quality of UK utilities so as to inform future EIB lending decision in this sector. Over five months, working very closely with EIB staff involved, the students developed a specific financial model -which will be used by the EIB in the future- and applied it to UK utilities under the guidance of the EIB with the help of Moody’s the rating agency, and Ofgem.
The result ? RIIO is broadly credit neutral compared to the previous methodology used by Ofgem, and, although it might put additional pressure on the credit metrics of underperforming UK utilities, it should not impact their credit ratings even in a number of stress-tested scenarios.
This is the third Capstone project conducted by the EIB with the students of the LSE’s Master’s degree in Public Administration. As part of their curriculum, students are required to undertake a consultancy project on a selected topic relevant to a client organisation (a Capstone project) -for example, a group of MPA students is tasked with performing a real-life consulting project at the EIB under the guidance of EIB staff. A number of international organisations such as the World Bank, EBRD, OECD and the UK Government are regular participants in the MPA Capstone programme.