Ofgem has set out plans for less lucrative price controls for gas networks and electricity transmission operators from 2021.
The draft five-year framework intends to allow networks to make returns on equity of 3.95 per cent, half of the current level after repeated warnings from the likes of Citizens Advice that networks, sanctioned by Ofgem, have been making billions in excess profit across the eight-year price control.
This time Ofgem, which also removed £8bn from the networks spending plans, has delivered a better outcome for bill payers, said the consumer watchdog.
“Ofgem has struck the right balance between shareholder returns and value for money for energy customers, while making sure networks can continue to attract investment,” said CEO Gillian Guy.
Industry lobby the ENA was less positive. Investors will look for higher returns elsewhere – and the UK needs to attract a lot of money to fund decarbonisation, it argued. CEO David Smith said the group would “work with Ofgem” to highlight concerns ahead of the final deal in December.
A “deeply concerned” SSEN Transmission offered a withering assessment, suggesting the plan “fundamentally fails to deliver on net zero, inadequately reflects stakeholder and customer needs, and falls short in seeking to attract the significant investment required”.
It is “a barrier towards achieving net zero and damaging to the green economic recovery”, said MD Rob McDonald.
National Grid was equally unimpressed. It said the regulator’s plan “leaves us concerned as to our ability to deliver resilient and reliable networks, and jeopardises the delivery of the energy transition and the green recovery.”
Scottish Power CEO, Keith Anderson, was characteristically blunt.
“This was Jonathan Brearley’s first big test as the new Ofgem chief executive and he’s flunked it,” he suggested. “Instead of investing more in creating green jobs and skilled apprenticeships in every community, at a time when the UK needs them most, this is a short-sighted return to austerity politics. Nobody benefits from this half-baked plan. It’s bad for jobs, bad for apprenticeships, bad for training and bad for the UK supply chain.”
The networks warned that if Ofgem does not rethink its calculations, the spending control is likely to be held up by an appeal the Competition and Markets Authority.
Within the draft, Ofgem outlined plans to:
- Allow £25bn over the five-year control
- Allocate £10bn, and potentially more funding if justified, for forward looking decarbonisation investment
- Allocate £3bn upfront for connections and grid upgrades
- Set aside at least £630m for innovation projects & £500m for networks to reduce their own environmental impacts.
The ESO is set to be allowed a higher return on equity of 5.28 per cent. Ofgem said it played a key enabling role and its incentives were designed to enable it to deliver that role over driving down internal expenditure.
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