Ofgem reduces cuts to returns for networks, green lights £40bn funding
Ofgem is halving the returns the UK’s energy utilities are allowed to make, the regulator confirmed on Tuesday, though the cut is less than initially proposed.
The energy watchdog has ruled that the UK’s network companies, which run the pipes and wires that transport gas and electricity around the country, will be permitted a baseline rate of return of 4.3% from April 2021.
That is down sharply from the current rate of 7-8% but an improvement on the 3.95% first proposed earlier this year.
That proposal angered utilities, who argued it was too low and threatened to bring a case to the Competition and Markets Authority.
Ofgem said the new rate would contribute to £10 savings on the average domestic energy bill.
Jonathan Brearley, chief executive, added: "The costs must fall fairly for consumers. We are reducing the amount paid to shareholders so that they are closer to current market levels. This means that companies can attract the vital investment we need while making sure that consumers don’t pay more than is necessary."
However, both SSE and National Grid said they would now review the latest proposals.
Rob McDonald, managing director of SSE’s SSEN Transmission unit, said: "We are greatly encouraged by the broad support for our stakeholder-led business plan throughout Ofgem’s consultative process, and cautiously welcome Ofgem’s movement on a number of fronts.
"However, at this stage in our assessment, we continue to have concerns and will need to reflect further as we review and assess the full settlement in the round over the coming weeks."
National Grid said it would review the proposal "to see whether it delivers sufficient investment to maintain resilient and reliable networks, provides the flexibility required to enable the delivery of critical infrastructure to achieve the UK’s net-zero ambitions and provides and appropriate overall financial package".
Russ Mould, investor director at AJ Bell, said: "Utilities are often seen as safer investments as their returns are regulated and therefore predictable. But as this episode illustrates, this is only true over the course of the fixed period and then the regulator can pull the rug from under their feet.
"Predictably, SSE, National Grid and their peers are still unconvinced by this latest offer, and the authorities face the task of balancing the need to incentivise investment in renewables and other low carbon energy sources while also looking to protect the consumer."
As well as the reduction in returns, which will remain in place until 2026, the regulator has also given the green light for £30bn upfront funding for energy companies to help deliver "a clean and reliable energy system", as well as more than £10bn on standby for future green projects.
Said Brearley: "Our £40bn package massively boosts clean energy investment. This will ensure that our network companies can deliver the climate change ambitious laid out by the prime minister while maintaining world-leading levels of reliability."
The UK government is currently targeting net-zero emissions by 2050, and last month it unveiled a 10-point plan for its so-called "green industrial revolution", including a ban on the sale of combustible engines from 2030.