Ofgem proposes lower network returns

The energy regulator has unveiled proposals to cut the rate of return that network company shareholders will receive on their investments.

Ofgem said is approach under the next price controls approach will be tougher, requiring lower costs and better service quality from network companies.

It will also be designed to allow the companies to support the UK’s transition to a low carbon economy.

The regulator also said its “Revenue=Incentives+Innovation+Outputs 2” (RIIO-2) regulations would save consumers £5 billion over five years, or up to £25 a year on a typical dual-fuel bill.

The plan, which is due to begin in 2021, proposes a “cost of equity” range – the amount network companies pay their shareholders – of between 3% and 5%, the lowest ever suggested for energy network price controls in Great Britain.

The regulator said: “Ofgem is able to drive forward a tougher regulatory framework for the next price control thanks to a stable, predictable and low risk regulatory regime which ensures consumers benefit from high levels of investment and innovation at the lowest cost.”

Stable regulation means lower costs

Ofgem said network companies have invested £100bn in national and local grids since the 1990s, with the number of power cuts halving over the same period.

The cost of transporting a unit of electricity around Great Britain has fallen by 17% since the mid-1990s, relative to the retail price index, the watchdog added.

Jonathan Brearley, Ofgem’s Senior Partner for Networks, said: “Ofgem’s stable regulatory regime allows companies to attract investment from around the world on behalf of consumers in Great Britain at the lowest cost.

“We will capitalise on this by getting network companies to work harder to deliver better value for consumers in the next price controls.”

‘Transparency and stability’

David Smith, Chief Executive at the Energy Networks Association, the trade body that represents the companies that operate and maintain the gas and electricity grid network in the UK and Ireland, said: “Energy networks are the nerve-centre of a smarter, cleaner energy market, responsible for delivering a range of exciting new services for our homes, businesses and communities.

“Balanced regulation is fundamental to delivering these and the price control system should evolve to suit the changing needs of consumers.

“RIIO-2 must deliver that whilst being founded on the principles of transparency and stability to provide predictability for investors, innovators and consumers alike.”

> Read Ofgem's announcement