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The energy sector is dominated by a natural monopoly with little real accountability. Not National Grid, the business that runs wholesale power distribution, but Ofgem. The regulator reports to MPs obsessed with short-term voter popularity rather than future kilowatt hours. It has therefore proposed harsh cuts to the returns utilities are permitted to make. The pendulum has swung too far in favour of consumers.
In July, Ofgem proposed halving the real rate of return that electricity and gas network companies can earn to as little as 3.95 per cent (5.3 per cent nominal) from April 2021. Spain’s grid company receives a rate a fifth higher and in the US returns are almost double.
The determination followed complaints from consumer groups that networks rip off consumers with excessive charges, while paying out juicy dividends to shareholders. Light-touch regulation was blamed.
It is true share prices of National Grid and Scottish counterpart SSE have done well relative to the FTSE All-Share index over three years, beating it by 10 percentage points including plenty of dividends. But this partly reflects the defensive characters of the shares in the run-up to Brexit.
Transmission networks are vital to the nation’s goals for shifting to renewable energy. Without batteries, solar and wind power can only offer intermittent power, putting the onus on grid companies to keep the juice flowing.
A blackout a year ago was not National Grid’s fault. Future ones could be. In defending its rate decision, Ofgem rejected investment projects by National Grid and SSE. Worryingly, asset maintenance would have been one mission of these projects.
It would be easier to shrug at Ofgem’s realpolitik if it resulted in substantially lower bills to consumers. Yet charges may only fall by about £4 per household annually, reckons Bernstein. Energy price declines this year delivered 25 times that impact.
A final decision comes in December. Ofgem needs to soften its stance. Otherwise the UK will struggle to find investors willing to put up the capital needed to keep the country’s energy backbone flexible.
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