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SHE Transmission RIIO-2 Business Plan

User Group Report

20 December 2019

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1. Executive Summary

2. Governance and Remit of the User Group

3. Track-record and Business Plan Commitment

4. Enhanced Engagement

5. Outputs and Incentives a. Meeting the needs of consumers and network users b. Maintaining a safe and resilient network c. Delivering an environmentally sustainable network

(Conclusions) – Chapter as Appendix 4

6. Enabling Whole System solution a. Local Area Energy Plans

7. Managing Uncertainty: Uncertainty Mechanisms

8. Innovation

9. Competition

10. A Consistent View of the future and Net Zero Target

11. Costs

12. Consumer Value Proposition

13. Appendices:

• Appendix 1 - Terms of Reference

• Appendix 2 - Challenge Log

• Appendix 3 - July and October draft Business Plan User Group Comments

• Appendix 4 – Delivering an environmentally sustainable network

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1. Executive Summary ‘Enhanced Engagement’ is a central theme of the RIIO-2 process. One element of this engagement has been establishing an independent User Group. Over the past 18 months, we have been given unfettered access to the SHE Transmission business teams, the senior management team and the SSEPD Board members. We have been consulted on the emerging strategies and plans developed by the business teams as they build up their RIIO-2 Business Plan and we have held face to face meetings with a range of SHE Transmission’s stakeholders. The User Group extend our thanks to stakeholders and the business for fully embracing the enhanced engagement process. We also thank the business for its timely provision of the information we have requested and their positive responses in considering the challenges we have raised through the development of the plan. Our approach has been to;

• Listen, scrutinise, challenge and review information provided by the business

• Engage directly with stakeholders and consumer representative groups to verify that

the engagement feedback being used by the business to develop their strategy and

delivery plans is representative and, where trade-offs have been made, these trade-

offs recognise service, cost and performance risks and opportunities arising in a

balanced, thoughtful way

• Seek out and review, where possible, independent sources of information to verify

data used in the plan in support of service, cost and performance information.

We have engaged with the business and stakeholders through the development of the RIIO-2 Business Plan proposals. Using the expertise and experience within the Group, we have both challenged and encouraged the business to present proposals that reflect the priorities and needs of their customers and stakeholders and are ambitious, effective, efficient and sustainable. It is important to note that, although the User Group has had approximately 20 days of meetings time over the past 18 months, we have had to prioritise our time to focus on those business plan topics we believe are most relevant to our remit and we acknowledge there has been time limitations on our ability to scrutinise the full depth of detail and information made available by the business in its Business Plan submission to Ofgem. We also note that our remit does not require us to endorse the Business Plan nor provide assurance that all costs included in the plan are efficient. It is not within the remit of the User Group to provide a view on the overall financeability of the Business Plan. This matter is reserved to the Challenge Group. Ofgem have specified a Business Plan Incentive mechanism they will use when assessing the plan submitted by the business. The views of the User Group and Challenge Group will be taken into account in making this assessment. This assessment is structured in such a way that the business must first demonstrate their plan has achieved the minimum requirements set out in the Ofgem Business Plan Guidance document (October 2019). It is the view of the User Group that the SHE Transmission Business Plan meets these minimum requirements. This report records the observations and conclusions of the User Group. The structure of our report follows the guidance provided by Ofgem. We also refer to topics we suggest can be explored further by Ofgem and/or through the Open Hearing process. The views expressed in this report are held consistently by all members of the User Group. It was not our intention to achieve a consensus view on topics, but we have not recorded any divergence of views on the content of this Business Plan.

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The User Group’s primary purpose is to consider whether the business has developed a genuine understanding of its customer, end-consumer and stakeholders priorities and needs, whether it has engaged on a realistic range of options and that this engagement has been on-going, two-way and transparent. In addition, the User Group has considered how the views of customers, end-consumers and stakeholders have influenced the ambition, service, cost and performance measures that make up the Business Plan. In order to fulfil our purpose, the User Group has also considered the business’ evidence base, external benchmarking and independently sourced information to verify the level of ambition being proposed in the plan reflects improved outcomes for customers and end-consumers and that the proposed plan is deliverable. This consideration of beneficial outcomes is critical given delivering the Business Plan would result in an increase in end-consumers bills in the RIIO-2 period. Each section of this report provides our conclusions on specific topics within the Business Plan. We also highlight overarching findings, conclusions and our views on topics that could be addressed at an Open Hearing. Enhanced Engagement The business has positively embraced the enhanced engagement process for defining its ambition and goals for RIIO-2. It has used the process to support building the Business Plan’s content, assessing priorities and testing the range of strategies and delivery plans on which the Business Plan is dependent. There was recognition that change within the business was required and they invested time and expertise in reviewing and refreshing the Engagement Strategy and implementing a number of significant initiatives focused on embedding stakeholder engagement into the heart of their ‘business as usual’ (BAU) approach. This strategy is detailed in the plan alongside a credible implementation plan timescale. The User Group has encouraged and supports the work done in this area and also supports their plans for ongoing engagement commitments being proposed. RIIO-2 Business Plan Goals This Business Plan is built around five goals. These have been developed and refined through a continuous internal and external engagement process. An extensive consultation exercise was undertaken in July and August 2019 to test that the developing content of the June draft Business Plan supported the principles of these five goals and confirmed that these described the level of ambition the business is committed to achieve and align with stakeholder priorities. It also revealed that stakeholders, customers and end-consumers wanted to see, more clearly, that cost effective solutions would be delivered in their focus on achieving 100% Transmission network reliability. This feedback has been taken into account in this plan. There is a consistent linkage between the delivery plans and performance measures that make up the detail of Business Plan. Certain View and Pathway to Net Zero The Business Plan explains the rationale used to develop programmes of work for RIIO-2 that the business refers to as the Certain View. The outputs of the Certain View will deliver a higher volume of connected generation capacity than that considered in the scenario proposed by Ofgem for the RIIO-2 period, the ENA Core-Low. We have studied the information that supports the need for connected generation capacity and, although there is a small provision for anticipatory spend within the Certain View scenario, the User Group believe this scenario describes a credible proposition on which to develop the detail of the Business Plan. We also note that delivering the programmes of work within this Business Plan enables the business to support the wider GB ambition to achieve a Net Zero position by 2050.

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Efficiency Delivering this Business Plan will require an increase to end-consumers bills. This places the highest level of scrutiny on the business’ ability to both manage and maintain the network to higher levels of service and deliver new infrastructure using the most efficient mechanisms possible. The Business Plan details a variety of mechanisms to support efficiency; asset condition based interventions, use of innovative techniques, benefits from IT system investments during RIIO-1 and procurement mechanisms to drive efficiency in the supply chain. One of the five business goals is to deliver £100m efficiency saving from innovation. The User Group believe the Business Plan could have gone further and been clearer in detailing how efficiency opportunities have been quantified and how they will be tracked through RIIO-2. We also believe there are two opportunities in the Load and Non-Load programmes to quantify efficiencies that have not been fully exposed in this plan. Specifically, opportunities arising from clustering projects (project justification papers contain details of such opportunities) and assigning a more bespoke risk valuation to the cost of each project depending on its anticipated stage of development at the start of RIIO-2. We suggest this is a topic for consideration at the Open Hearing. Environmental Action Plan (EAP) The business has developed and consulted on a comprehensive Sustainability Strategy and Sustainability Action Plan (SAP). There is a specific requirement to develop a EAP for the RIIO-2 Business Plan. The details of the EAP are contained within the SAP. We recognise the Sustainability Strategy and SAP go beyond both the scope and minimum performance requirements detailed in the Ofgem Business Plan Guidance. Our observations of the specific elements of the EAP are given in Appendix. 4. The business has placed an “environmentally sustainable network, delivered through Leadership in Sustainability” at the heart of this Business Plan to reflect the strategic objective to enable the transition to a low carbon economy. We have observed the commitment to achieving this objective consistently throughout the business, and feedback from stakeholders, customers, and end consumer representatives are supportive of this commitment. Consumer Value Proposition (CVP) The requirements to develop a CVP were not fully detailed by Ofgem until September 2019. The CVP must offer levels of service and/or performance achievements beyond those contained in the delivery of the core Business Plan, in this case, beyond delivery of performance levels associated with the Certain View scenario. The business has prepared a proposal based on delivering additional value in three main areas: sector leading efficiency; safe and secure network operations; and leadership in sustainability. The User Group was not able to scrutinise this proposal prior to its incorporation in the Business Plan. We have provided our initial views on the proposal in this report, but we recommend this as a topic for consideration at the Open Hearing to allow a fuller exploration of the details and assessment of the consumer value it could deliver. We have prepared this report based on our scrutiny of the information provided by the business throughout the development of its Business Plan, information provided by a wide range of stakeholders, customers and end-consumer representatives and, where available, with reference to independent assessment and assurance reports. We extend our thanks to everyone we have worked with for their inputs, their patience and their time. Contributors to the User Group have given freely of their knowledge and expertise and been continually enthusiastic about their involvement in this enhanced engagement process.

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2. Governance and Remit of the User Group Meaningful and impactful stakeholder engagement has always been a core element of Ofgem’s RIIO regulatory framework, (Revenue = Incentives + Innovation + Outputs) this focus has not only led to better engagement between network companies and their stakeholders, it has also helped to enhance delivery outcomes for customers and end-consumers. In March 2018, Ofgem published their consultation on the framework for the next set of Transmission price controls (RIIO-2), starting in 2021. Within this document, Ofgem outlined their intention to further build on this stakeholder engagement process, including using lessons learned and good practice from other utility sectors. For further improvements to be realised, and to ensure Business Plans are aligned with a wide range of consumer needs, Ofgem has introduced an Enhanced Engagement model for the RIIO-2 price control to capture feedback from a broader variety of interest groups and influencers. The User Group will work on behalf of electricity consumers, customers and wider stakeholders to ensure SHE Transmission submit a robust Business Plan that delivers a sustainable and efficient future network. In August 2018, SHE Transmission established an independent RIIO-2 User Group. The group consists of eight experts. Ofgem outlined the areas of expertise expected to be represented on the group. The User Group comprises:

• Tracey Matthews - Chairperson

• Wendy Barbour – Stakeholder and Supplier

• Graeme Stewart – Distribution Network Operator

• Niall Stuart – Generator customers

• Doug McAdam – Stakeholder and Environment

• Julian Leslie – Electricity System Operator

• Geoff Aitkenhead – Asset Management

• Gareth Harrison – Innovation

• Jenna Black - Secretariat

The group has held 13 meetings over 19 days. The schedule of meetings and agenda topics are shown below. There has, additionally, been a number of topic specific ‘deep-dive’ meetings involving a smaller number of Group members and topic experts from the business. Members of the Group have attended various public stakeholder engagement meetings held by the business, in particular, the Business Plan consultation events through the summer of 2019.

2018/19 meeting dates and topics;

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Governance of the User Group A Terms of Reference was developed and approved by User Group panel members in October 2018. Attached as Appendix 1. Minutes The Minutes of the meeting are taken by the User Group Secretariat, reviewed by the Chair and once agreed, are issued to members of the User Group for approval at the next meeting. A summary of each meeting is available on the User Group webpage within the SHE Transmission website. Actions The User Group Secretary has responsibility to ensure they are responded to in a timely fashion. Challenges Challenges require a formal response on action taken by the business. The User Group Secretary has responsibility to ensure Challenges are responded to in a timely fashion or brought back to be revisited at a future User Group meeting. Challenges raised and responses received are recorded on a Challenge Log. The Challenge Log is attached as Appendix 2. SharePoint All User Group information is shared on a secure SharePoint site. The User Group members, including the Secretary have access to the site.

12 December 2019 SSE, Glasgow User Group report on Business Plan

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3. Track-record and Business Plan Commitment

Delivery of RIIO-1 output targets The User Group has examined RIIO-1 delivery performance up to 2018/19 and forecast delivery to end of RIIO-1, referring to annually published performance reports, annual regulatory reports and discussion of information provided during a number of meetings with the business. The internal processes to collate, assure and report RIIO-1 performance are thorough. The business has robust plans and processes in place to deliver the remaining RIIO-1 outputs. We note that the RIIO-1 capital delivery programme contains a significant increase in outputs to those within the original Business Plan as a result of RIIO-1 fast tracking and a significant Strategic Wider Works programme (SWW). The User Group asked for a comprehensive list of RIIO-1 outputs in the Final Business Plan to support assessment of delivery commitment and highlight deferrals across the full suite of outputs, not only the Ofgem RIIO-1 primary outputs. The business has provided the User Group with forecast data that indicates no deferral of outputs from RIIO-1 Cost savings against RIIO-1 allowances, enabling a return of monies to end consumers and supporting returns to shareholders, have primarily been achieved from efficiencies in delivering the SWW and Load related capital programmes. These programmes are forecast to deliver circa 12% cost savings. Given the SWW work programmes were not scoped and costed in the RIIO-1 Business Plan, we noted it would also be helpful, for comparative purposes, if the RIIO-1 cost analysis reflected the original ex-ante Load programme scope and allowances. The net RIIO-1 outturn cost forecast is circa 4% lower than regulatory allowances, this includes overspend in the Non-Load programme due to some asset condition information being less reliable than expected during the preparation of the RIIO-1 Business Plan. During the RIIO-1 period, the business has taken steps to improve asset data, primarily through investing in GIS and Maximo IT systems and reviewing and updating its approach to Asset Management (supporting documents 8 and 8a). This work supports confidence in the proposed scope and cost of the RIIO-2 Non-Load programme. The User Group note that the risk of similar overspend conditions arising in RIIO-2 should be significantly mitigated and thus the full benefit of delivering cost savings should be available to support RIIO-2 consumer value mechanisms and the Consumer Value Proposition proposals. Assessment and benchmarking of RIIO-1 unit costs and efficiencies across all cost categories has been carried out by the business and, separately, through independently commissioned reports from Arcadis and Oxera (referenced in supporting documents 7, 7a, and 9). This provides confidence that the unit cost basis used by the business for RIIO-2 business planning is robust. We note the business proposes to continue delivery of 13 Load related RIIO-1/RIIO-2 crossover projects under RIIO-1 mechanisms. Depending on the forecast delivery stage of these projects at March 2021 and the proposed RIIO-2 mechanisms, there may be opportunities to deliver increased consumer value by applying RIIO-2 mechanisms to the remaining delivery phases of these projects. However, the User Group note the value of these contacts has been accounted for in securing RIIO-2 supply chain performance and cost efficiencies.

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Levels of Service The business has recognised the opportunity to make a step-change in the service it offers to its current and future connection customers; TO, DNO and ESO customers; and its stakeholder engagement and customer satisfaction ambition. Our views on these RIIO-2 ambitions and proposed performance measures are set out elsewhere in this report. We support plans to begin introducing proposed RIIO-2 service and engagement changes in advance of the start of RIIO-2. The levels of service delivered through RIIO-1, to date, have been consistent with the performance targets set by Ofgem. We note that these levels of service have been delivered whilst the business has also delivered an additional £1,798.2m SWW capital programme in addition to the capital delivery programme agreed in RIIO-1 and Load programmes accounting for a capital delivery programme over 100% increased from that detailed in the ex-ante RIIO-1 programme. The RIIO-1 period has been one of sustained asset growth to support a forecast doubling of connected generation capacity in the North of Scotland. Additional projects have been delivered in the Non-Load programme to support service reliability alongside the investments in GIS and Maximo IT systems. This is enabling improved targeting of Operations and Maintenance activities, as well as supporting justification for the RIIO-2 Non-Load programme scope. This activity supports the reliability and resilience ambitions set out in the Business Plan. Shareholder returns and pay/performance The Business Plan sets out the principles used by SSE Group plc (the Company) to determine shareholder dividend policy and decisions. This information is consistent with the Company’s annual reporting. The pay and reward structure is set out in the plan. This is overseen by the SSE plc Group Remuneration Committee. The User Group has not undertaken any additional work to further assure the details of the Company’s Remuneration and Reward policies or benchmarking. As a FTSE 100 listed business, SSE plc is subject to all relevant financial reporting requirements alongside the financeability-related conditions within its electricity Transmission licence. The Company is compliant with these specific conditions. Assurance The User Group have had unlimited access to the SSEPD Board and SHE Transmission senior management teams. At our request, sessions of each User Group meeting have been attended by both the Managing Director, SHE Transmission and representatives of their senior management team, dependent on the topics under discussion. The User Group has also questioned the Independent Directors of the SSEPD Board to assess their engagement in developing the Business Plan, the decision making processes to approve the strategies, ambition, delivery plans, cost base decisions, and to confirm the governance arrangements for approval of the plan. We are satisfied that the appropriate governance and assurance arrangements have been exercised by the business in the development and approval of the plan. We have examined the business processes that support justification and approval of expenditure items. These processes are robust. The introduction of a revised Asset Management strategy may require a review of existing cost benefit analysis and expenditure approval processes to ensure alignment with the strategy. We note the intention to develop and implement a cost benefit analysis methodology to account for the impact of carbon reduction.

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The SSE Group internal audit function routinely audits across all areas of process compliance. Their reports are reviewed, including tracking of any actions arising, by the SSE plc Audit Committee. In addition, the business commissioned a number of independent reports to assure business processes and the cost base assumptions used in the Business Plan.

4. Enhanced Engagement

Giving consumers a stronger voice Introduction This section of the report covers SHE Transmission’s approach to engagement with respect to ensuring that consumers, customers and stakeholders have been, and will continue to be given the opportunity to influence business decisions regarding the content of SHE Transmissions’ final version of the Business Plan submission and on-going business initiatives. SHE Transmission’s establishment of the ‘Enhanced Stakeholder Engagement Process’ In August 2018, SHE Transmission established an independent User Group, fulfilling the requirement set out in Ofgem’s July 2018 RIIO-2 Business Plan Guidance. SHE Transmission has demonstrated significant appetite to engage positively with the User Group - all requests for meetings, presentations, deep dives have been agreed and delivered. Conversations have been open and honest, it was very apparent to the User Group that the Executive and senior management team put significant effort into developing the User Group’s understanding of the business, its ambitions and ultimately the detailed content of the Business Plan.

There has also been solid evidence where the Executive team in SHE Transmission have listened to feedback and discussion at the User Group and as a result, have amended their approach, thinking and ultimately the Business Plan content.

Likewise engagement with the Challenge Group has been positively embraced, whilst the level of engagement is not as great as with the User Group, the Executive have demonstrated diligence around feedback from the Challenge Group. Whilst not always adhering to the Challenge Group requests, they can evidence and defend their business rationale for adopting a differing approach or stance.

Conclusions

• The business is on track to deliver all its RIIO-1 outputs

• Performance and levels of service, to date, are consistent with the ex-ante RIIO-1 Business Plan

• Connected generation capacity is forecast to reach 8.1GW by end of RIIO-1. This has been facilitated by a significant Strategic Wider Works programme and Load Programme in addition to the RIIO-1 ex-ante settlement. These programmes, in conjunction with the ex-ante programme, are forecast to deliver cost savings of 12% over the period

• Unplanned expenditure of £105m on Non-Load projects and IT systems was required to address asset condition and asset data management. The investment in these IT systems and updated Asset Management policies and procedures should mitigate this risk recurring in RIIO-2.

• RIIO-1 outturn costs have been independently assessed and assured, alongside industry benchmarking data, to determine RIIO-2 input costs.

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SHE Transmission has an established Stakeholder Advisory Panel, made up of representatives of key stakeholder groups and this panel liaises with the User Group and the Executive team on a regular basis. Communication between SHE Transmission and SHEPD will have always been strong due to the close proximity of the working relationships. However, due to the increased focus on Whole System thinking and operation, there is an acknowledgement that communication should and could be improved and formalised between the 2 entities.

Who and how all Stakeholders have been involved? SHE Transmission have carried out a comprehensive programme of engagement with their stakeholders and customers in the development of their Business Plan. They have utilised a broad range of communication and engagement methods including: consultation events; written consultation; bi-lateral meetings; workshops; webinars; primary and secondary research; industry events; staff engagement; mailers; social media; and advertising. They engaged with a broad spectrum of stakeholders representing all groups as detailed in their Business Plan and the supporting document ‘RIIO-2 Business Plan Stakeholder Engagement Report’. They conducted an extensive consultation process over the summer for their draft Business Plan published in June 2019. The output from this consultation process has moulded the content that has been submitted in the Business Plan in December. SHE Transmission have openly made available the draft and final Business Plan and many of the supporting documents for stakeholders to review and comment on. The User Group has had open access to all documentation, including those that have not been published due to confidentiality concerns. The User Group had a detailed debrief on the output from the draft Business Plan consultation process and were afforded the opportunity to attend any of the events that were being held be SHE Transmission with their stakeholders. SHE Transmission have acknowledged in their Business Plan that engagement with future customers is key but reaching these customers is an ongoing challenge as they may not yet be visible. During RIIO-2 they propose to be involved in more innovation and collaboration projects led by 3rd parties and as a result hope that this will provide access and feedback from this group. The User Group acknowledges that due to the makeup of the industry and stakeholder groups, stakeholder fatigue is an issue that will be a challenge to overcome for all the TOs. However, with differing modes of engagement being available and better feedback – so that it is not viewed as a one-way street but that the stakeholders see benefit from their on-going engagement, this should be surmountable SHE Transmission’s proposals to ensure ongoing Stakeholder engagement During the period that the User Group has been operating and engaging regularly with SHE Transmission the quantity and quality of their stakeholder engagement has seen a significant step change improvement.

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Initially stakeholder engagement did not figure as a key accountability for anyone specifically within the SHE Transmission staffing structure, it was seen as a project work stream deliverable. During RIIO-1 SHE Transmission acknowledge that engagement was in the main transactional, they had focussed on project engagement, with a proactive approach to customer and consumer engagement in both the lead up to approval of projects, as well as during the delivery of the project. Many of the lessons learned and process changes as a result of the Beauly Denny experience have been adopted as BAU activity. Recognising that change was required, SHE Transmission implemented a number of significant initiatives to ensure that Stakeholder engagement is embedded in their organisation:

• Introduction of a new Operating Model to create clear accountability through the organisation. This model also introduced a revised Executive Committee structure.

• Creation and appointment of Director of Customers and Stakeholders. A role that will ensure there is a concerted focus on ongoing engagement. This team is forecast to be 41 Full Time Equivalent (FTE) by the end of RIIO-2. The Business Plan outlines the key roles that report into the Director and the key accountabilities of each area, all demonstrating the commitment to deliver ongoing engagement that will influence business decisions and outcomes.

• SHE Transmission have also established a Shadow Board that will help to ensure that the views of employees are heard and acted upon.

• Their Stakeholder Engagement Strategy/Action Plan outlines the desire to move from the current transactional approach to building a relationship with stakeholders and to ultimately build a partnership approach, where stakeholders, customers and SHE Transmission are all advocates for one another. Whilst this is the correct ambition it will require significant Executive support and cultural change across the organisation.

• SHE Transmission have also indicated that they intend to implement the establishment of an independent stakeholder group to monitor and review the delivery of the Business Plan, and to provide advice and independent assessment of future investment cases.

• The incorporation of Stakeholder Engagement into all staff objectives, along with the proposed business wide training programme, will help drive a cultural shift in the organisation towards better operational cognisance of stakeholder needs.

More specifically SHE Transmission has:

• Accepted the incorporation of a Quality of Connections Survey (as an Output Delivery Incentive, ODI) to measure Connection customer satisfaction, setting an aspiration of delivering 100% of connections on time will raise customer expectations and it will therefore be possible to disappoint. So, the combination of the Goal with the proposed Survey will shine a light on SHE Transmission’s performance.

• SHE Transmission have proposed the inclusion of a Stakeholder Engagement Commitment (as a Price Control Deliverable, PCD), this will require SHE Transmission to undertake key stakeholder initiatives and set specific Key Performance Indicators (KPIs) that will be publicly reported against. They also propose to seek external assurance against AccountAbility Stakeholder Engagement Standard (AA1000 SES).

• Proposed compliance with Enhanced Reporting Framework (PCD). In collaboration with Citizens Advice Bureaux and Citizens Advice Scotland they have developed a reporting framework that will require them to publish “complete information on their performance, financial structures, gearing and ownership”. This will have KPIs as agreed with the Stakeholder Advisory Panel and will be reported on annually.

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• SHE Transmission have recognised the importance of supporting Local Area Energy Planning and Community Energy Development as a route to understanding local stakeholder issues and concerns. Their Business Plan and the supporting document ‘Local Area Energy Plans and Community Energy’ outlines key commitments that they will deliver during the RIIO-2 period.

The User Group supports the inclusion of these proposals. However, given there is little data available currently to benchmark performance, the agreement of the principles and the timely establishment of them will be required for the true impact to be understood during the RIIO-2 timeframe. What changes have been made by SHE Transmission to their Business Plan as a result of this engagement There are many examples outlined in the Business Plan and the supporting document ‘RIIO-2 Business Plan Stakeholder Engagement Report’ that demonstrate where SHE Transmission have modified their Business Plan content as a result of feedback from stakeholders. One of the key areas was the creation of the Certain View which the SHE Transmission Business Plan is predicated upon. SHE Transmission developed 3 Future Energy Scenarios well in advance (in 2016) of the Ofgem Guidance request for an Energy Networks “Core” scenario. The SHE Transmission scenarios considered factors that are regionally specific to the SHE Transmission geographical area such as devolved Governmental Targets, demand projections, differing social and economic drivers, prevalence of onshore wind development and the slower uptake of Electric Vehicles (EVs) than experienced in GB. SHE Transmission consulted on the content of these localised scenarios and received significant feedback about what the stakeholder priorities were, and on the back of a 4-stage process including public consultation and face to face interviews with customers they identified a range of regionally specific insight and trends to include in their planning. This feedback from stakeholders has been used to develop SHE Transmission’s Certain View (underpinning the Business Plan submission), the ‘Likely Outturn’ and the possible pathways to Net Zero (a view of potential additional SHE Transmission projects to deliver on the Committee on Climate Change emissions target by 2050 and the Scottish target of 2045 as outlined in May 2019). An area where SHE Transmission has demonstrated action as a result of User Group and stakeholder feedback is the inclusion of their goal of ‘Every Connection Delivered on Time’. Stakeholders indicated that this is a key area of frustration when they are trying to plan and progress their projects. In addition to this, the User Group challenged SHE Transmission about whether they should be delivering for customers beyond the current Licence Obligations (LOs). As a result of this feedback, SHE Transmission has committed to the goal outlined in their Business Plan and are developing a significantly improved customer experience around connections. This is one of the key pillars of SHE Transmission’s Customer Value Proposition (CVP).

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Conclusions

• SHE Transmission adopted an open book approach to engagement with the User Group.

• The User Group has encouraged the business to be bolder with stakeholders in their communications regarding their track record of delivery on time and on budget within RIIO-1, whilst delivering a significantly larger build programme than had been anticipated. Communicating clear facts and achievements or difficulties with confidence is welcomed by stakeholders and enables conversations, and thus stakeholder feedback, to be more specific. The Executive Team acknowledged this and understand the need to embed a cultural change in the organisation to better communicate the ambition, plans and achievements to external audiences. The User Group also challenged the initial level of ambition being articulated by the Management Team. This is an area where there was clear evidence of a shift in Executive approach as a result of User Group feedback.

• The appointment of a new MD and the new Executive Management Team delivered a re-energised focus on the business ambition and goals. The Management Team were very keen to share and articulate their proposed business strategy and have worked closely with the User Group on the content and narrative that they developed for staff, stakeholders, customers and consumers consultations. This narrative was within the June Business Plan draft and was consulted on over the summer. Feedback from this consultation programme, alongside that from the User Group, Challenge Group and SSEPD board members has been accounted for in this Business Plan.

• Enhancing Stakeholder engagement capability has been addressed through organisational changes, recruitment and modified job descriptions. It is still early in the cycle of change management and will require continued effort by the Management Team to deliver on their ambitions and commitments.

• The User Group has witnessed a growing desire by the business to embrace Stakeholder Engagement in the creation of their Business Strategies, Delivery Plans and this Business Plan. They have taken references from other industry models and best practice approaches. We are confident they have the right processes and a growing capability to a sustain high quality engagement activity through RIIO-2.

• The User Group believe the minimum requirements set by Ofgem have been met and exceeded.

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5. Outputs and Incentives

5.a. Meeting the needs of consumers and network users

Introduction The User Group has examined the full range of outputs that SHE Transmission propose to deliver in the RIIO-2 period with particular focus on the consumer and stakeholder endorsement of both the needs that have driven the inclusion of the outputs in the Business Plan and the scope of the proposed interventions. The Needs of Consumers and Network Users At a headline level the intent of the Business Plan with regard to meeting the needs of consumers and network users is captured in the “Five clear goals”:

• Transport the renewable electricity that powers 10 million homes

• Aim for 100% Transmission network reliability for homes and businesses

• Every connection delivered on time

• One third reduction in our greenhouse gas emissions

• £100 million in efficiency savings from innovation We set out elsewhere in this report our views on the stakeholder consultation processes that the business conducted to develop and validate these high-level objectives. The business’ translation of the above high-level objectives into deliverable outputs for inclusion in the Business Plan was based on their development of a strategy to meet anticipated consumer and network user needs over the next 10 years. This strategic planning took cognisance of GB-wide, and North of Scotland Future Energy Scenarios, culminating in the development of a Certain View that was then used in the preparation of the Business Plan. The User Groups observations on the Certain View and its development are covered in section 10 of this report. Proposed Outputs The outcomes that will be delivered for consumers and network users will be realised through a combination of outputs delivered through operations/maintenance activities and capital investment. The outputs are dominated by capital investment schemes that account for £2,031.6 million of the £2,356.1 million total expenditure proposed. Operations and maintenance activities account for £324.5 million. Tables provided in the Business Plan set out the comprehensive lists of proposed targets and outputs to be delivered during the RIIO-2 period. The “Target” tables clearly indicate the types of outputs proposed (Licence Obligation (LO), PCD, ODI or CVP) with associated metrics. Other tables in each section of the Business Plan set out the schemes to be delivered, their investment drivers, their description, cost estimate and proposed delivery dates where appropriate. When taken together these tables provide clarity on the full range of outputs to be delivered for consumers and network users. All of the proposed interventions in the network have been derived through asset management techniques that are set out in the Business Plan and supplementary papers provided to the User Group. The Business Plan refers to the Asset Management Excellence Model (AMCL) that sets out 39 areas of business activities that contribute to the business’ asset management model. The User Group requested the inclusion of information in the Business Plan to show the current level of maturity in each of these 39 areas along with proposals for improvements in maturity during the RIIO-2 period. The costs and benefits of the improvements were asked for.

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The business decided against including this information on their asset management maturity because the latest available third party assessment was carried out in 2017 and it was considered by the business to be unrepresentative of their current maturity. The next assessment is due to be carried out in the Spring of 2020. Operations and maintenance Outputs One of the priority requirements of end-consumers is reliability of the Transmission network. Whilst in the long-term reliability, will be achieved through appropriate investment in new assets, on a daily basis reliability is dependent upon effective operation and maintenance of the existing network assets. The Business Plan sets out the business’ intentions with regard to the volume/cost of inspection and maintenance activities during the RIIO-2 period. This is forecast to increase from £3m in 2013/14 to £17m in 2025/26. The Business Plan states that the business will continue to use time-based schedules for inspection and maintenance during the RIIO-2 period, whilst beginning to invest in remote monitoring equipment that will, in future, enable continuous monitoring of asset condition and performance. Capital Investment Outputs Capital investment outputs are either driven by the need to replace ageing assets (Non-Load schemes) or are driven by foreseen increases in levels of consumer demand and network user connections (Load driven). The summary tables in the Business Plan provide a full list of proposed investment outputs in the RIIO-2 period. The User Group has examined the method used to select and promote Non-Load schemes. (A supplementary document was prepared by the business entitled ‘A Risk-Based Approach to Asset Management’). The Business Plan describes Risk Based Asset Interventions (i.e. investment proposals) that relate to the reliability of service to consumers. Further Non-load schemes that relate to security of supply are also listed. In addition, User Group members attended a deep-dive session to look in detail at the project life cycle, covering the activities undertaken between governance gateways, with particular reference to Load schemes. There is clear evidence that the business places appropriate importance on understanding its assets and their current condition and capacity. For Non-Load schemes the business has provided evidence of the way in which the method described in the supplementary document has been applied, using asset information to identify and prioritise assets for upgrade or renewal. The business has utilised the industry-wide Network Output Measures (NOMs) method to assess the need for intervention. (We noted that there is an industry-wide initiative to develop and implement the Network Asset Risk Metric, NARM methodology, but the timescales seem to be uncertain) The Non-Load schemes proposed have been developed as condition-based interventions and have been through option assessment processes to develop the preferred solutions. There is evidence of the consideration of impacts upon end consumers in both the decision to promote investment in order to avoid any deterioration in service quality and also in the impact on consumers during the implementation of the proposed intervention. The deep dive conducted by User Group members brought to light the recent external review of the Large Capital Projects Governance Framework Manual by Deloitte, in 2018. This gave the User Group comfort that the company recognised the need to objectively review its processes in order to ensure that lessons learned during the RIIO-1 period were being incorporated into the governance framework to be used in the RIIO-2 period.

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During the deep dive we briefly examined the approach to investment scenario planning noting the link to the Future Energy Scenarios (FES) and 10-year statements of energy requirements. When assessing investment delivery strategies and programming it became apparent that a ‘Business Opportunities Report’ is a Gate 0 deliverable. This report examines the possibility of linking projects for efficient delivery. The report makes recommendations in relation to the coordinated and/or combined execution of projects, with some adjustments to the timing of output delivery, in order to achieve efficiencies and to minimise outage impacts on consumers. The ‘Business Opportunities Report’ and Business Case for a project are owned throughout the project life cycle by the Systems Planning Team. When considering project development, the User Group noted that all projects in the Certain View programme are supported by an ‘Engineering Justification Paper’. This will include assumptions on the use of emerging technologies for quality and/or efficiency benefits. ‘Technical Authority’ approvals are sought at governance gateway Gate 2. This relates to engagement with the supply chain on technology options showing that the business is proactive in seeking new ways of achieving the outputs required. Samples of project specific documents on asset condition assessment and engineering justification have been examined by the User Group and found to be thorough in their preparation and conclusions. With regard to procurement and commercial aspects of project development it was noted that cost estimates are built up using an historic project cost database along with market price quotations. The confidence banding around a cost estimate tightens as the project scope and associated technical specifications are firmed up through progressive governance stages. These go from a high-level estimate at Gate 1 (+40% to -30%); to detailed estimate at Gate 2 (+25% to -15%); to contract price at Gate 3 (+10% to -5%). It was also noted that the risk allocation was revised at each governance stage. The User Group asked for the forecast gate stage of each project at April 2021 to be visible in the plan for each project in the Certain View and confirmation that the project costs had been adjusted according to the confidence banding and risk revision process appropriate to this gate stage. This information is not in the plan. It was noted during the deep dive assessment that all project cost estimates are based on the assumption that each project will be delivered in isolation. Given that the Business Opportunities Report gives consideration to bundling load and non-load projects on a geographic basis it is assumed that there will be efficiency savings made in programme management. A sample of a project specific cost and efficiency reports were examined by the User Group. Furthermore, a supporting document entitled ‘Efficient Capital Investment Benchmarking and Cost Metrics was accessed by the User Group and it was noted that third party assessments of cost estimating and efficiency had been conducted by Arcadis and Oxera with supportive conclusions. Project controls are effectively implemented through clear accountability for project management with a Development Project Manager (PM) appointed post Gate 0 to control time and cost through to Gate 2. A handover document is prepared by the Development PM and the project is passed to a Delivery PM post Gate 2 so that the Delivery PM oversees the preparation of the Works Information pack. This is an important element in the final contract for delivery of the outputs.

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Contracting is through a combination of tendering of projects and workload allocation to framework contractors. The preferred form of contract is the NEC Contract, Option A, and as this option demands a fixed price from the contractor the scope of works and specification must be developed in detail prior to seeking a contract price. To provide the level of detail necessary, detailed design work is done between Gate 2 and Gate 3 to fix the scope and technical specification. Project Review Boards, chaired by an independent Director, happen monthly post Gate 2 and will scrutinise all aspects of project delivery including a regular challenge of any risk provisions held within the estimated outturn cost. In discussions with the User Group the business has recognised the potential for more collaborative ways of working with their delivery partners, including the use of more incentivised forms of contract for the delivery of sub-programmes (bundles of projects) of work. Categories of Investment Projects in the RIIO-2 programme The User Group requested details against each project in the investment programme to indicate the maturity of the projects. The categories of investment projects will be;

• Projects rolling over from RIIO-1 for completion in RIIO-2

• Schemes under development Gate 0 to Gate 2 (some for delivery in RIIO-3, development budget only)

• Schemes at Gate 2 level of maturity

• Uncertain schemes outside of the Certain View A document entitled ‘T1-T2 Crossover Schemes’ was provided and gives details of 13 Load driven schemes started in RIIO-1 that will be completed in the first two years of RIIO-2.

Conclusions

• The outputs proposed for delivery in the RIIO-2 period are credible and relevant to the high-level ambitions of the Business Plan, founded on the Certain View.

• The proposed outputs are consistent with the needs of end consumers and stakeholders.

• The processes used by the business to identify investment needs and to develop the schemes are robust, laying appropriate audit trails of the justification of investment decisions.

• The focus of improvements in risk-based asset management during RIIO-2 is not clear.

• Project cost estimating is thorough and endorsed by a third-party review by Arcadis.

• Project cost estimating is based on an assumption that each project is delivered in isolation whereas the reality will be that projects will be bundled and sequenced to deliver overall efficiencies.

• Further assessment of project risk allocations is recommended to confirm the allocations reflect the gate stage of each project within the RIIO-2 delivery period

• The project delivery arrangements are robust and the business recognises the potential for more collaborative working with its delivery partners.

• The governance arrangements proposed are robust and were reviewed by Deloitte in 2018.

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5.b. Maintain a Safe and Resilient Network

Introduction This section of the report covers SHE Transmission’s approach and Business Plan content with respect to the operation and maintenance of a safe and reliant Transmission Network for its customers. SHE Transmissions refurbishment and replacement plan, its development and the value of delivering the plan It was clear to the User Group that there is a strong desire from the SHE Transmission’s Executive Team to increase the overall resilience of their network, helping provide a better service to its customers, stakeholders and consumers. The inclusion of their aim of achieving 100% Transmission network reliability for homes and businesses, where it is cost effective to do so, is a reflection of this. SHE Transmission willingly acknowledge that their RIIO-1 Business Plan underestimated the extent of refurbishment and replacement activity required during that period. This was mainly due to their legacy reliance on patchy data and ageing systems. As their network was growing significantly this became one of their key focuses to address during the RIIO-1 period. They have made a significant investment in a new asset information system, carried out a complete lead asset health review covering condition and performance data and have supplemented their workforce and skills base with additional Asset Management skills. In addition, they have been developing and are continuing to develop, in partnership with the other GB Transmission Owners (TOs), a common risk-based model for asset management (NARM), a combination of probability of failure and consequence of failure to attach a monetised risk value to each of the assets. Deliverability Assessment, Cost Benefit Analysis along with Optioneering and Prioritisation has led to 28 Non-load related projects (a combination of lead and non-lead assets) being identified for implementation during RIIO-2. Using the monetised Risk approach SHE Transmission have identified that the monetised risk benefit of these projects during the RIIO-2 period to be £533m. A comprehensive overview of SHE Transmission’s risk-based approach and how a monetised risk score is calculated for each asset is included in the supporting document ‘A Risk Based Approach to Asset Management’. This document outlines the level of diligence that is undertaken in the decision process to determine which projects require to be included in the Business Plan. Various case studies are outlined in this document and the Business Plan to describe the detailed process, the level of analysis and optioneering required, with Cost Benefit Analysis being produced for all the projects and these have been made available to the User Group to review on request. These asset interventions will help SHE Transmission maintain and operate their network at a level of risk that is acceptable to their stakeholders and aim to deliver no Transmission outages for homes and businesses. In addition, the inclusion of site-specific remote monitoring in many of the lead assets will improve data quality and should provide early indications of where refurbishment or replacement is required, as well as increasing the overall knowledge of asset performance across the North of Scotland SHE Transmission have recommended the inclusion of a PCD on a Monetised Risk target at the end of RIIO-2 that would result in a reward or penalty if not achieved.

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It would measure SHE Transmission’s ability to intervene efficiently on the right asset at the right time to reduce the risk of network failure The proposed inclusion of PCDs on both the International Transmission Asset Management Study (ITAMS) and International Transmission Operations and Maintenance Study (ITOMS) benchmarking to indicate operational performance and efficiency of spend, demonstrates the ambition to strive for improved performance as an Asset Manager during RIIO-2. SHE Transmission have set out a long-term goal beyond 2026 to be world class in asset management. In addition, as a result of activities included in their work force action plan, they plan to build a more robust organisation with all the appropriate competencies required to manage an asset base of the size SHE Transmission will have under its control. They will continue to develop the NARM methodology to support better asset management, they also will widen this approach during the RIIO-2 period to cover non lead assets.

Stakeholder feedback on proposed Business Plan content SHE Transmission has undertaken significant stakeholder engagement throughout the development of the Business Plan, with a number of engagement/consultation/bilateral sessions on many topics. The underlying sentiment that percolated was that ‘security of supply is the most critical factor’, followed by cost control, better stakeholder engagement and more consideration of environmental and societal issues. Detailed consultation was carried out to determine stakeholder appetite for investment in specific projects to enhance asset management and security of supply, and whether SHE Transmission should be acting at ‘minimum standard’, ‘responsible operator’ or ‘progressive network enabler’ level. The key areas the consultation covered were:

• The asset replacement programme and whether stakeholders supported the acceleration of specific projects into RIIO-2

• Materials Management – How to store critical spares to enable the ongoing and efficient operation of the network and deliver appropriate response in emergencies

• 100% reliability target – strive for 100% network reliability for homes and businesses

• Intelligent Network Control – New Control Room, Control Systems, Protection Systems and Communication

• Investing to prepare for Blackstart – should SHE Transmission go above the minimum requirements.

Using the detailed feedback from stakeholders, along with feedback from the User Group, SHE Transmission have included in their Business Plan a number of key projects (£330m) to increase the overall resilience, compliance and performance of the network, through better monitoring, increased digitisation, improved security and faster response and recovery. The level of investment included for these projects reflects the levels indicated by stakeholders that they would be prepared to support. Specific initiatives and improvements proposed to increase the resilience, compliance and performance of the network A new approach to Spares and Inventory Management (£53.6m), including the establishment of 2 purpose-built manned storage facilities, the introduction of a secure inventory management system and the purchase of strategic critical spares to hold in stock.

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This area of operations required to be addressed due to the increasing size of the Network that SHE Transmission manage. The proposed investment will ensure a satisfactory response time for customers, help to minimise risk, whilst also providing improved physical and cyber resilience. The proposed costs for the project were developed in conjunction with the SSE plc Property Services function, external architects and independent experts to ensure that the spend was included at a realistic and appropriate level. Protection, control and physical security improvements (£98.9m). These improvements will help to improve the overall resilience of SHE Transmission sites. They have to comply with the ESQCR 2002 and new STCP 27-01 guidelines that were released in 2018, and in doing so have identified a number of projects that require intervention and investment. Response and Recovery (£51.1m). The implementation of Solar PV, installation of EV charging points and battery augmentation to allow 120 hours of standalone operation at 92 substations will all add to SHE Transmissions ability to ensure appropriate response and recovery times to meet current requirements and to deliver an appropriate level of support in a Black Start event. Remote Real Time Asset Monitoring (£45.4m). SHE Transmission propose to install remote monitoring equipment into 63 sites across their network, that will facilitate real time integrated condition and performance monitoring, along with the development of data collation and analytical tools. This will allow preventative intervention to increase operational performance and give early indication and trend analysis on where future intervention is required. It will remove the need for an on-going time-based inspection and maintenance program which will save on operational costs. It is noted that the business will in parallel continue to use time-based schedules for inspection and maintenance during the RIIO-2 period. New Control Room – (£16.3m) Currently SHE Transmission operate a single control room in Perth, on a site that also houses other SSE plc entities. They are located within the same control room as SSEPD. As the asset size, value and importance to GB grows, and as technology and digitisation requirements get more complex, it has become very clear to SHE Transmission that the current control room and back-up site is no longer fit for purpose. After the development of a number of different scenarios to remedy this, and the feedback from their consultation process, they have included the costs associated with the construction of a new Control Room that is compliant with current security and operational standards. In addition, costs have been included to convert the current control room to provide a satisfactory back-up facility. The proposed costs for the project were developed in conjunction with the SSE plc Property Services function, external architects and independent experts to ensure that the spend was included at a realistic and appropriate level. Pollutants Management (£7.3m). This investment is required to comply with EC Directive 96/59/EC on the disposal of PCBs and Polychlorinated Terphenyls. IT spend (£57.8m) – The IT spend included in the Business Plan has been either classified under a ‘provider’ or ‘enabler’ category, providers being IT platforms that delivery tangible benefits and enablers being the introduction of tools and functions to support said providers. Given the growing size of the asset base SHE Transmission are now responsible for, and recognising their diverted focus during RIIO-1 towards the delivery of major capital projects, it seems reasonable that there requires to be a period of investment to bring their digital environment up to date.

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Organisational enhancements SHE Transmission have produced and are in the process of implementing their Sustainable Workforce Strategy and detailed Workforce Action Plan, highlighting many activities that they are going to undertake to ensure they are building a strong and resilient workforce with the right competencies and culture. They have an ambition beyond 2026 to be world class in Asset Management. SHE Transmission have indicated that recent benchmarking, unpublished as yet, shows that there have been improvements in their performance relative to the other contributors. The Sustainable Workforce Strategy and Action plan were developed in consultation with both the User Group and The Stakeholder Advisory Committee. The User Group were keen to ensure that SHE Transmission was being cognisant of both the Net Zero and Likely Outturn scenarios, as outlined in the Business Plan, in the development of their resourcing plans both internally and when liaising with their supply chain. The stakeholder consultation process included supply chain participants and they openly welcomed the transparency of the Certain View but acknowledged that the Likely Outturn and Net Zero view needed to be factored into their planning as there was a distinct possibility that either of these scenarios could in fact be the better indicator of project scope over the RIIO-2 period. SHE Transmission’s appointment of an external Asset Management professional on to the senior management team shows the desire to improve and adopt best practice asset management business processes and practices. They are utilising AMCL, along with ITAMS, to gauge their strengths and weaknesses and where they require key capability development. To address some of the pipeline issues that are prevalent in the engineering sector SHE Transmission have introduced and are actively increasing their Apprentice and Graduate programmes, they have been working closely with Universities and Colleges to help to attract young people into the industry. SHE Transmission have developed their strategy and action plan in conjunction with technical experts in the fields of Learning and Development, Health and Safety and Inclusion and Diversity. They have consulted with Trade Unions, and staff representatives. SHE Transmission and SSE plc have committed to establishing or already have initiatives covering but not limited to, Living Wage, Fair Tax, Living Hours, Societal contribution and Gender Pay Gap. Efficiency of spend SHE Transmission have developed their capital expenditure plans for replacement and refurbishment of existing assets using detailed optionality assessments, analysis and benchmarking to RIIO-1 spend levels. They have calculated the lifetime risk benefit arising from the 28 proposed projects to be £55billion, and the monetised risk benefit of the projects is forecast to be £533m over the RIO2 period. SHE Transmission operate a detailed Large Capital Project gate process and have an independent assurance function that reviews and ensures best discipline and best practice in all capital development, focussing on programme delivery, risk management and outturn cost. They have reviewed their supply chain management methodology to ensure efficiency gains are captured and will continue to do this throughout the RIIO-2 period. SHE Transmission have engaged Oxera Consulting LLP and Arcadis LLP to assess relative efficiency of spend compared to their peers. Both reviews provide strong support for their current efficiency levels and SHE Transmissions approach to forecasting costs.

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Regarding their direct and indirect network operation costs, they have carried out 2 analytical studies to give them confidence in the efficiency of their costs. They have performance levels that have shown they benchmark as a low cost/average service provider when compared to others using the ITAMS. They have a target to achieve low cost/high service provider status by the end of the RIIO-2 period. The IT investment plan was made available to the User Group for review (£57.8m). The content of the plan has been reviewed and challenged by Gartner. They have deemed the proposals to be at an appropriate level of spend for an organisation of SHE Transmission’s size. They have also participated in the Transmission Cost Benchmarking project undertaken by Sumicsid and the Council of European Energy Regulators (CEER), and after engaging independent analysis of the data the analysis shows that their operating costs would need to increase by 25% to be below their current 100% efficiency assessment. Cyber Resilience and IT Investment Plan. SHE Transmission have provided a RIIO-2 Cyber Security IT paper as supporting document to their Business Plan. This document outlines their proposals to enhance their cyber security resilience during the RIIO-2 period (it does not cover Operational Technology which will be covered by a separate submission at the end of the RIIO-1 period). SHE Transmission has outlined that their proposals are made on the basis that Ofgem will permit a mid-period re-opener mechanism to cover new risks/threats, as well as new statutory/regulatory requirements if and when they materialise. SHE Transmission is part of a much larger group, SSE plc, which has a large IT capability with extensive Cyber Resilience competencies. In the development of the submission and in the ongoing maintenance of their plans SHE Transmission will draw upon this knowledge and expertise. They have a dedicated Business Partner operating within the corporate IT department focussed only on Transmission requirements. They have carried out a comprehensive review to determine the scope of applications and projects that require to be assessed. They have considered which threats and risks to these applications and projects may materialise. They have then assessed, prioritised and provided cost estimates for the remedial activities that are required to counter these risks. They have also analysed the sensitivity of the data held in SHE Transmission applications, its integrity and the criticality of the services provided by each application. The underlying principles that have been followed in the development of the plan are:

• They will adopt a continuous improvement approach, ensuring they are always aware of the changing threats and risks to their systems and data.

• They will leverage the SSE plc security capabilities and expertise.

• Any new systems and processes will be developed with security at the forefront. It concentrates on 2 key areas of focus, bringing the existing applications up to date, and embedding security into any new IT initiatives as they are deployed. SHE Transmission have indicated that they embrace the opportunity to engage with Ofgem and BEIS (as the joint Competent Authority) during current and future workshops to assist in the ongoing development of Cyber Security Plans for the overall Network.

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User Group challenge of the Cyber Security plan has been limited due to timing. However, it appears comprehensive and wide ranging. The User Group have also taken comfort from the involvement of the SSE plc IT Department in the development and management of the plan.

Conclusions

• Over the period that the User Group has been in operation, SHE Transmission has significantly modified their approach to asset management. As SHE Transmission has acknowledged, the RIIO-1 period was very focussed upon the delivery of significant large capital projects on time and within budget. They are now addressing the need to bring their Asset Management and Operational capabilities up to par to ensure that they are well placed to operate and maintain the large asset base they manage in the North of Scotland.

• The User Group had to prompt the Executive team to acknowledge their past performance and track record of managing the network well, but the User Group agree that the time is now right for there to be appropriate investment in professionalising the systems and processes and augmenting the capabilities within the organisation to ensure that they are set up for success going forward.

• SHE Transmission adopted a consultative approach with the User Group on their plans to strive for Upper Quartile performance as an Asset Manager (ITAMS) by 2026. Whilst the User Group commend the ambition shown, we feel that perhaps they are setting themselves a stretch target that may be unachievable in the timescales they are proposing. However, their structural and capability proposals seem appropriate for an organisation responsible for the management of an Asset Base of this size.

• The Executive Team demonstrated a strong desire to mould an organisation which has a deep-rooted culture of doing the right things for customer and stakeholders and that they are more than just a proud Asset Manager and Builder.

• There was an open book approach adopted when sharing with the User Group a detailed review of their Risk Management approach and we were provided with deep dives into a number of the projects that were being reviewed as part of the process. Further detailed analysis was available if the User Group wanted to review and delve deeper, but SHE Transmission evidenced that due diligence had been carried out and that the appropriate documentation was available for scrutiny if requested.

• It was also clear to the User Group that while carrying out the optioneering and prioritisation of the refurbishment and replacement activity, SHE Transmission were mindful of the requirement to sometimes invest earlier to avoid regret spend later particularly when considering the Net Zero and Likely Outturn scenarios. Ensuring reduced overall spend for consumers in the longer term.

• SHE Transmission provided the User Group with a number of site visits over the period. One was to their current Control Room, and there was a general acknowledgment by the User Group that given the criticality of an efficiently operating SHE Transmission Control Room to national infrastructure, and the growing need for digitisation and automation of the asset base, it was not fit for purpose and required to be addressed.

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• The User Group presented a challenge to the SHE Transmission team around the Price Control Deliverable for the delivery of two Specialist Warehousing Facilities and whether this was the correct target to demonstrate success or failure. Given that the justification of the investment is to have the correct spares available at the right time to minimise negative impact on the North of Scotland network, the Challenge Group questioned if the PCD should be focussed on the provision of the critical spares. This challenge took place after the Business Plan had been prepared and submitted. SHE Transmission acknowledged this and indicated they would be happy to consider an amended PCD.

• Due to the timing of SHE Transmissions IT and Cyber plans, there has been a limited opportunity to delve into the detailed content of the plans that have been outlined and the associated costs. However, the User Group takes comfort that the plans have been developed in conjunction with the SSE plc IT Department who have extensive competencies in this area and that Gartner have reviewed and agreed that the levels of IT spend are appropriate.

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5c. Delivering an environmentally sustainable network Given the substantial quantity of information provided to support the business’ Sustainability Strategy we have recorded our detailed observations at Appendix 4. The conclusions drawn from this work by the User Group are below;

• The business has set out an ambitious and credible Sustainability Ambition in Section 6 of the Business Plan and in the Sustainability Action Plan (SAP) for delivery in RIIO-2. This plan builds upon the business’ established Sustainability Strategy clearly setting out their ambitions for delivering an environmentally sustainable network in RIIO-2 through leadership in sustainability across clearly defined and assessed impact areas. Of note is the fact that the business’ sustainability strategy and approach already has a significant degree of maturity and materiality. It has already been developed with stakeholders, consulted upon, refined, published, updated and integrated into the business processes.

• The proposals set out clearly reflects the business’ strategic objective of enabling the transition to a low carbon economy and aligns with the business’ long term environmental and sustainability goals of decarbonising the energy network and working to deliver Net Zero through a Science Based Target (SBT). The proposals and outputs in the plan are aligned with achieving the stated goals of the Business Plan. Each objective of the SAP links to a corresponding outcome in the Business Plan and has an action plan, set against timescales, showing how that objective will be delivered and against which metrics performance it will be measured and how this will be reported.

• The Business Plan, SAP and supporting documents have together covered all the minimum requirements set out in the Ofgem Business Plan Guidance and are set out in a clear and understandable manner, with appropriate references to supporting documents where required.

• Evidence and material reviewed showed that the plans and proposals set out in the Business Plan and SAP are well evidenced and referenced, have been subject to a thorough quality assurance and governance process and meet the minimum requirements set out in Ofgem’s Business Plan Guidance.

• The Business Plan and SAP have gone further and wider than Business Plan Guidance requirements in several important areas setting out some sector leading sustainability ambitions which are consistent with the business’ wider sustainability strategy and ambition to deliver Leadership in Sustainability.

• The methodology and process to review and understand the environmental and wider sustainability impact of the business’ network and to produce the proposals contained in the SAP for RIIO-2 is clear, well evidenced and has been robust with an appropriate audit trail and references to associated strategy, consultation and review documents. “Deep dives” have been undertaken by the User Group into supporting documents and internal business papers.

• Engagement with stakeholders, including customers and supply chain, has been comprehensive and is well evidenced in the Business Plan, SAP and the associated referenced supporting strategy documents and consultation reports. Proposed outputs are consistent with and supported by stakeholder feedback.

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• Each Impact Area in the SAP is consistent with one of the Sustainability Ambitions in the business Sustainability Strategy and sets out a clear set of outcomes, objectives and proposals, how they were arrived at, the enhanced stakeholder engagement undertaken and a review of current performance. Each area sets out credible plans for delivery including focused action plans with key activity, outputs, milestones and appropriate metrics and reporting to measure performance of delivery in that area.

• With regard to deliverability, the business has correctly identified the significant importance of its supply chain in delivering the ambition set out in the SAP across the identified key impact areas. As well as capturing this in their approach to sustainable procurement and reporting in RIIO-2 in the SAP, they have clearly recognised the potential and need for more future collaborative working with delivery partners to achieve their stated ambitions in the plan.

• The CVP Proposals under Leadership in Sustainability to deliver additional benefit and value to customers, current and future, both quantitative and qualitative, have been set out with evidence of stakeholder support, the monetisation methodology, estimated value and any limitations.

• Within the constraints of the process the business has provided the appropriate information and responded positively to ongoing challenges and clarifications in a timely and comprehensive way. Engagement with the business’ sustainability and environment team in this area has been excellent. The quality of the information and considered responses provided through documents and people has been of a consistently high standard. The influence of the User Group input and challenge is clearly evident in the various iterations and final documents.

6. Enabling a Whole System Solution

SHE Transmission has taken on board the comments and challenges from the User Group earlier in the year. The Business Plan now clearly sets out SHE Transmission’s plans and ambitions for the approach to Whole System solutions. It is clear from the Business Plan that SHE Transmission understand the broad range of customers and stakeholders that need to be engaged with and work alongside to create the best value whole system solution. This includes all of the usual industry parties but also the ESO and the local communities that are developing their own solutions. It is also clear that the approach SHE Transmission is taking truly considers the whole energy system and doesn’t just focus on the whole electricity system, although understandably this is the focus with tangible outcome in the early years of RIIO-2 whilst a longer term framework is developed in parallel. Alongside the specific chapter and supporting documentation on whole system solutions, SHE Transmission have embedded whole system throughout the Business Plan and demonstrates a clear understanding and commitment to drive to find the best consumer output by finding the right whole system solution. It is clear from the plan that SHE Transmission will not only coordinate with SHEPD but also Scottish Power, ESO and NGET. This is especially focused on the coordinated approach to finding the right solution for the Eastern HVDC link. Their plan also talks about engaging with the wider stakeholder groups that cover the regional specifics of the impact on heat and transport, taking into account the different geography and demographic in the far North of Scotland.

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In RIIO-2 SHE Transmission has taken to work across the industry to develop and create a whole system ‘framework’ that will allow for a consistent approach and consistent cost benefit assessment to allow for apples with apples comparisons and the impacts on society. SHE Transmission have built upon and made recommendations to adjust the Co-ordinated Adjustment Model so that the threshold is lowered, and funding is allocated to feasibility and development work to explore different whole system approaches. The User Group supports this approach and believe it will encourage greater focus and delivery of benefits on a whole system basis. Through SHE Transmission’s development of the North of Scotland scenarios they are able to take the national picture from the ESO GB FES and tailor to the specific demographic and topography of the SHE Transmission area. This allows for a deeper understanding of the impacts of whole system changes such as Electric Vehicles (EVs) and domestic heating to be understood and hence a right sized fit for purpose network can be developed. SHE Transmission has many examples of whole system thinking in action already, Shetland Isles, Dundee City and the North East 400kV reinforcement. It is not only the benefit to electricity customers that are tracked through this process but the benefits to society as a whole. The development of the proposed framework in conjunction with the amended Co-ordinated Adjustment Model will allow for SHE Transmission to further develop their whole energy system solutions. Many of these plans are still in development and through the work in a trail-by-doing approach and through the development of an industry framework, SHE Transmission will be able to quantify and value the benefits to the broader area of the economy and society. Until this work is done it is difficult to provide these numbers in the plan. SHE Transmission have enhanced their assessment processes by adding into the equation the social and environmental benefits for their electricity whole system solutions and are working to develop a cross vector solution recognising that to develop a solution which is the best whole energy system solution may lead to one organisation/vector having to invest more than they otherwise would have done. SHE Transmission recognise this and have proposed to take a lead in this space. Whole System thinking is embedded throughout the Business Plan and encompasses all areas of the plan. It is therefore difficult to find and highlight the dedicated whole system resources and activities as they are embedded in all of their processes. In the Business Plan it is clear that SHE Transmission have seen the benefit of whole system thinking through the driving down of costs for the consumer and enhancing the ability to utilise greener and lower cost forms of energy. Throughout the plan SHE Transmission are committed to developing a consistent framework for assessing cost, economic and social benefits. SHE Transmission have already expanded their electricity assessments to include social and economic impacts and they look to expand these calculations to incorporate other sectors. These benefits will be assessed using the full range of options including asset solutions, smart management systems, market based solutions and ultimately across all energy vectors. There is strong evidence that SHE Transmission has engaged a broad stakeholder base on whole system solutions. As a User Group we have seen this come through the Business Plan and supporting evidence. Many of SHE Transmission’s innovation areas are focused on and are impacted by whole system solutions.

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Through SHE Transmission’s existing work, described in the plan, and the areas of further continuing work and through the innovation projects it is clear that SHE Transmission have and are working on many whole system solutions at present, albeit these are electricity focused, with plans to expand across the whole energy sector.

6.a. Local Area Energy Plans

SHE Transmission is proposing to take a leading role in developing and supporting Local Area Energy Plans. There are details set out in the plan of collaborative partnerships already underway and specific commitments to enhance the business’ involvement in local energy plans through the RIIO-2 period. These plans build on a Scottish Government commitment, and through the trusted position that SHE Transmission holds with many existing and new stakeholders SHE Transmission can bring communities together using this trust and expertise to support the local communities. SHE Transmission clearly understand the challenges facing these local energy schemes and can help them to navigate through the complex energy frameworks. This will help enable the energy transition to a low carbon future and assist the communities and Government to meet the national targets. The approach taken by SHE Transmission is a very visible and tangible way in which they can use their stakeholder relationships and knowledge of the industry to support local communities and accelerate these communities to develop whole system low carbon solutions.

Conclusions

• The User Group has challenged SHE Transmission on their approach to Whole Energy Systems and as a result what is presented in the Business Plan, is a comprehensive and holistic approach to whole energy system thinking and development of frameworks and incentives such that this becomes a value adding and fundamental part of every operation of the SHE Transmission business.

• Due to the unique nature of the geographical footprint of SHE Transmission’s area and their relationship with SHEPD then whole system is an integral part of their approach to developing their networks and operations, this Business Plan extends the approach to cover the wider whole energy system and proposes developing a framework within which whole energy system solutions can be developed.

• As a result of the embedding of whole system into the plan it is difficult to highlight the specific costs and benefits from within the plan. However, as new areas are developed there is a robust Cost Benefit Analysis in place which continues to be developed as more whole system thinking is built into the calculations. SHE Transmission has made recommendations to amend the incentives and funding in this area to ensure that funding would be available for the development of smaller projects as well as those above the £20m materiality level.

• The User Group agrees that this Whole System approach is thoughtful and rigorous and will deliver consumer benefit in the long run.

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7. Managing Uncertainty - Uncertainty Mechanisms Introduction In any business environment there will be uncertainties that potentially pose risks to the costs of running the business and risks to the delivery of the desired outputs and outcomes. This is particularly true when the planning horizon of the business stretches out in excess of five years. The User Group has examined the proposed approaches to managing uncertainties as set out in the Business Plan. A particular focus for the User Group was to assess whether the proposals are fair and equitable in achieving a balance of risks borne by the business and those borne by consumers. The supplementary paper on the Regulatory Framework spells out in paragraph 3.4 the undesirable nature of building a Business Plan on scenarios where the needs are not clearly established. The possible consequences are that… “Either base allowances are included which may transpire not to be required (a windfall to the network company) or no allowance is included, and the investment need materialises (a material risk to the network company’s returns and delivery of consumer outcomes)” Proposed Uncertainty Mecha