Britain’s energy regulator is proposing to cut in half the returns large energy companies such as National Grid and SSE are allowed to make to cover their costs of maintaining and improving electricity and gas networks.
Ofgem’s announcement on Thursday sparked outcry from network companies, which warned that lower returns would risk their ability to deliver reliable services and to ensure Britain’s energy system could cope with the big changes required to deliver the government’s 2050 net zero emissions target.
Ofgem said that from April 2021, it plans to set baseline returns companies such as National Grid, SSE, ScottishPower and Cadent are allowed to make at 3.95 per cent, which would mark a record low and compares with returns of 7-8 per cent under the current regulatory regime. The figure also compares with a previous proposal last year of 4.3 per cent.
The costs of maintaining electricity and gas pipes and cables are recovered from consumer energy bills and represent about a fifth of an average bill. Given that energy networks effectively operate monopolies, Ofgem sets allowable returns under a “price control” framework. The next regulatory period is due to run for five years from April 2021.
Ofgem has previously come under attack from consumer groups and the National Audit Office, Whitehall’s spending watchdog, for its oversight of energy network companies. Citizens Advice in 2017 accused network companies of making “eye-watering” profits at the expense of consumers. Former Labour leader Jeremy Corbyn had proposed to renationalise network companies.
Energy networks will be key to delivering the UK government’s net zero target, by supporting the rollout of electric vehicle charging and the switch from gas boilers to heating buildings through low carbon alternatives such as heat pumps or even hydrogen.
Ofgem said the proposals, which apply to companies that own national gas and electricity infrastructure, as well as local gas networks, would save consumers £3.3bn over the next five years.
“Ofgem is working to deliver a greener, fairer energy system for consumers. This is why we are striking a fair deal for consumers, cutting returns to the network companies to an unprecedented low level while making room for around £25bn of investment needed to drive a clean, green and resilient recovery,” said Ofgem chief executive Jonathan Brearley.
National Grid said it was “extremely disappointed” with the proposals, which left it “concerned as to our ability to deliver resilient and reliable networks, and jeopardises the delivery of the energy transition and the green recovery”.
SSEN, the networks arm of the FTSE 100 energy company SSE, said it was “disappointed and deeply concerned”.
Deepa Venkateswaran, analyst at Bernstein, said she thought it likely network companies would appeal against the decision, which is subject to consultation, if Ofgem does not change its position later this year as “these proposals do not appear financeable in our view”.
Both National Grid and SSE were among the biggest fallers on the FTSE 100 on Thursday morning, each down more than 3 per cent.