Ofgem proposes to halve energy returns, National Grid 'disappointed'

Electricity regulator Ofgem has proposed price controls for networks as part of its plans to save consumers £45 per year, sending shares of National Grid lower on Tuesday.

The FTSE 100 group said it was "disappointed" with Ofgem's proposed financial package for the next price control period from 2021, which will see "smarter, fairer and cleaner" reforms to the energy market.

Much lower costs of capital for network companies to raise money for investment will result in lower returns for investors and more savings for consumers, Ofgem said.

Ofgem proposed to set baseline cost of equity returns at 4%, which is roughly 50% lower than the previous price controls, and aims to keep adjusting the cost network companies face to borrow annually "so that consumers continue to benefit from the fall in interest rates since the financial crisis".

The lower overall cost of capital is forecast to save consumers £6.5bn in the next price controls from 2021 onwards.

Alongside the network price controls, Ofgem said it will "press ahead with further network charging reforms to squeeze more capacity out of the electricity grids to cut the cost to consumers of moving to a smarter, more flexible energy system", including incentives for drivers to charge electric vehicles outside peak times and more flexible grid access arrangements to suit renewable generators.

Energy network operator National Grid it was "disappointed with the proposed financial package, in particular the cost of equity range as we do not believe it appropriately reflects the level of risk borne by transmission networks".

The FTSE 100 company argued that to deliver the major capital programme required across its networks it needed "fair returns" for shareholders and said it would provide a detailed response to the consultation in early 2019.

National Grid saw its shares fall more than 6% to 783.5p by midday on Tuesday.

Citizens Advice chief executive Gillian Guy said: "Energy network companies have had it too good for too long. Ofgem's commitment to a tougher price control should curb the excess profits networks have been allowed to make.

"This is good news for people as this should result in lower bills."

Russ Mould, investment director at AJ Bell, said National Grid, loved by many investors for its dividends, is particularly affected by the announcement.

"National Grid is not happy, saying the proposed finance package doesn’t reflect the level of risk borne by transmission networks.

"The consensus analyst forecast is for National Grid to pay 48.9p per share in dividends for the financial year to March 2020, implying a 6.1% yield. One could expect dividends beyond 2021 to potentially be less generous should Ofgem’s proposals be finalised without any amendments.

"It shows that even the most defensive companies are still at risk from regulatory changes."