UK ENERGY LAW AND ELECTRICITY SYSTEM – INFRASTRUCTURE MORAL HAZARD AND RISK ALLOCATION

1. Introduction

Infrastructure moral hazard arises where an electricity-system participant can make decisions affecting risk while another party—consumers, taxpayers, insurers, contractors, network users or the state—ultimately bears substantial consequences. Risk allocation law seeks to prevent this distortion by placing operational, financial, construction, performance and regulatory risks with the party best positioned to control or mitigate them.

The issue is particularly significant in Britain's electricity networks because transmission and distribution networks are regulated natural monopolies. Ofgem uses RIIO (Revenue = Incentives + Innovation + Outputs) price controls to determine network revenues while incentivising efficient investment and service performance.

2. Regulatory Allocation of Infrastructure Risk

UK energy regulation does not simply guarantee that network companies recover every cost they incur. Under RIIO, Ofgem determines the revenues that regulated networks may recover from consumers and establishes incentives and penalties connected with performance.

This creates a regulatory risk-allocation structure:

Network companies bear risks associated with inefficient management and poor performance.

Consumers bear appropriately recognised efficient network costs through regulated charges.

Investors bear elements of financing, business and regulatory risk.

Contractors may bear construction, delay, defects and performance risks under infrastructure contracts.

Government may intervene where risks become matters of national energy security or systemic resilience.

Ofgem's Network Asset Risk Metric (NARM) illustrates this approach. NARM links network-company funding to the delivery of risk reduction through asset-management activities, while financial adjustments and penalties can apply where companies under-deliver against baseline risk outputs.

3. Moral Hazard in Electricity Infrastructure

Moral hazard can emerge where regulated firms have limited exposure to the consequences of infrastructure failure because costs can ultimately be recovered from consumers. Conversely, excessive transfer of risk to private investors can increase financing costs and discourage essential investment.

The legal challenge is therefore to establish a proportionate risk boundary.

For example, if a transmission operator receives funding for replacing ageing equipment but fails to maintain the network adequately, allowing complete cost recovery could weaken incentives for prudent asset management. NARM attempts to address this by linking funding to measurable risk reduction. Ofgem's 2026 methodology also expressly considers changes in risk outside a company's control, recognising that not every adverse outcome should automatically generate a penalty.

4. Contractual Risk Allocation

Major electricity infrastructure projects also allocate risks through contracts. Construction agreements may allocate responsibility for:

design risk → contractor; construction delay → contractor subject to contractual qualifications; equipment defects → supplier; unforeseen regulatory change → negotiated allocation; force majeure → contractual mechanism; financing risk → investor/lender; operational failure → operator subject to licence and contractual duties.

The principle is not absolute. Courts examine the actual contractual language, causation, loss and statutory framework. In strategically important infrastructure, contractual allocation may operate alongside statutory duties, regulatory controls and competition law.

5. Case Law – EnergySolutions EU Ltd v Nuclear Decommissioning Authority [2016] EWCA Civ 1262; [2017] UKSC 34

Case Name/Citation: EnergySolutions EU Ltd v Nuclear Decommissioning Authority [2016] EWCA Civ 1262; Nuclear Decommissioning Authority v EnergySolutions EU Ltd [2017] UKSC 34.

Facts: The Nuclear Decommissioning Authority conducted a major procurement concerning the management and decommissioning of Magnox nuclear facilities. The unsuccessful bidder challenged the procurement process and alleged serious evaluation failures. The litigation ultimately reached the Supreme Court.

Legal Issue: What consequences and remedies arise where a public infrastructure procurer breaches procurement obligations?

Judgment: The Supreme Court considered the applicable procurement damages principles and the requirement of a sufficiently serious breach for damages under the relevant legal framework.

Legal Principle/Ratio: Public infrastructure procurement must comply with legally established procedures; allocation of commercial risk cannot legitimise unlawful procurement conduct.

Significance: The case demonstrates that infrastructure risks are not merely commercial risks. Legal-compliance risk itself must be incorporated into project governance.

6. Case Law – National Grid Electricity Transmission plc v ABB Ltd [2012] EWHC 869 (Ch)

Case Name/Citation: National Grid Electricity Transmission plc v ABB Ltd & Ors [2012] EWHC 869 (Ch).

Facts: National Grid pursued damages arising from the gas-insulated switchgear cartel. GIS is major equipment used in electricity substations, and National Grid alleged that cartel conduct caused substantial overcharges across numerous infrastructure projects.

Legal Issue: What losses could the electricity transmission operator recover following unlawful supplier coordination?

Judgment: The proceedings concerned the complex assessment of overcharge and consequential loss arising from the competition infringement.

Legal Principle/Ratio: Infrastructure procurement risk includes the risk that anti-competitive supplier conduct artificially increases project costs.

Significance: The litigation demonstrates why electricity-system operators must manage supplier, competition and pricing risks rather than assuming that competitive procurement automatically eliminates them.

7. Conclusion

UK infrastructure law therefore treats risk allocation as a combination of economic regulation, licensing, contract law, procurement law, competition law and asset-management incentives. The objective is not to eliminate risk—which is impossible in complex electricity systems—but to allocate it so that the party capable of controlling or reducing a particular risk has an appropriate incentive to do so.

The evolving NARM framework is especially significant because it connects regulated funding with measurable network-risk reduction while recognising risks outside operators' control. This provides a modern regulatory mechanism for reducing moral hazard while maintaining sufficient incentives for private investment in critical electricity infrastructure.