Ofgem proposes tougher price controls, clarifies plans for Hinkley Point connection

Ofgem said its plans to deliver savings of more than £5bn to consumers through “tougher price controls” for energy networks moved a step closer on Monday.

The energy regulator said the price controls would set the revenue monopoly network owners could earn from charges to consumers.

It confirmed that the default length of the next controls from 2021 would be five years, compared to the current eight years.

There would be no update to the 3%-5% cost of equity range - that is, the amount companies could pay their shareholders - at present.

That would be the lowest rate ever proposed for energy network price controls in Great Britain, Ofgem claimed.

It estimated that would result in savings of more than £5bn for household consumers, or between around £15 and £25 per year on a dual fuel household bill.

Ofgem also said it would extend the scope for opening up high value network upgrades to the benefits of competition across the gas and electricity sectors in the next price controls.

To signal its intent, Ofgem confirmed that National Grid could build the grid upgrade to connect the new Hinkley Point C nuclear power station.

However, Ofgem said it would set the revenue National Grid could earn from the upgrade based in part on its experience in cutting the costs of connecting offshore wind farms to the grid by tendering the ownership of these links.

“Today we have set out our plans which will bring in tougher price controls with lower expected returns for network companies,” said Ofgem’s executive director for systems and networks Jonathan Brearley.

“This is part of our ongoing programme to ensure that consumers get reliable and secure power supplies at a fair price.”

Brearley said that, as part of that continuous drive to deliver value for consumers, the regulator was using a new benchmarking approach to cut the costs of connecting the new Hinkley Point C nuclear power station.

“This is another example of how we are evolving regulation to deliver the upgrades to our power network while ensuring the impact on bills is kept as low as possible.”

Ofgem added that its decision on the framework for setting the next price controls also confirmed that new independent user groups and customer engagement groups would be set up by each of the companies to give consumers a stronger voice in how the price controls are set.

For the first time, open hearings will take place in the spring of 2020 where companies’ spending plans would be scrutinised.

The regulator was also retaining a funding package in the next price controls for innovation.

Technologists, scientists, inventors and innovators would reportedly be able to use that funding to solve some of the “biggest research and development challenges” in adapting the energy networks to a smarter, more flexible energy system.

That would include increased use of electric vehicles, more local production of energy and integrating digital technology.

National Grid quick to respond to Ofgem proposals

National Grid issued a rapid response to the proposals, saying it was “pleased” that the decision provided further clarity on the length of the price control from April 2021, and continued to put consumers and other stakeholders in a “central role” in the process.

The FTSE 100 firm, which operates Britain’s national high-voltage transmission network, said it looked forward to continuing to work “constructively” with Ofgem and other stakeholders over the coming months to achieve the “best possible outcome” for all stakeholders.

On Ofgem’s final decision on the delivery model for the Hinkley-Seabank project (HSB) National Grid said Ofgem's decision did not affect its commitment to delivering HSB to time and to quality as per its licence obligations.

“We will now review the detailed decision by Ofgem and consider all of our options prior to Ofgem formally implementing the proposals into our licence later in the year or early 2019,” the National Grid board said.

“The HSB project is expected to have a total cost of around £650m, with the majority of forecast spend by National Grid Electricity Transmission plc in the RIIO-T2 price control period from April 2021 onwards.”