Ofgem cuts investor returns on UK energy networks

Britain’s energy watchdog has cut the returns energy networks such as National Grid are allowed to make following fierce criticism of the monopolies that own the pipes and cables that transport gas and electricity around the country.

Ofgem — which sets the maximum amount of revenue that network companies can recover from users — plans to set the baseline rate of returns at 4.3 per cent from 2021, just above the 4 per cent proposed last December.

The new regime, which will run for five years from 2021, compares to returns of 7 per cent to 8 per cent allowed under the current regulatory regime. Ofgem said that it would save consumers £6bn over the five-year period.

Jonathan Brearley, executive director for systems and networks at Ofgem, said: “Our proposals are on track to deliver a tough, fair settlement that strikes a better deal for consumers.

“Lowering the cost of capital for network energy companies will put money back into consumers’ pockets while service standards are required to remain high.”

Friday’s slight increase to the allowed rate, compared with the December proposal, comes after the industry had pushed back against Ofgem, arguing that a fair return would be between 5.5 and 6.3 per cent.

Analysts said the announcement would be seen as a slight positive by network companies, set against the December proposal. But National Grid said the new rate still “did not fairly reflect the level of risk borne by networks”.

Nonetheless shares in National Grid rose by around 1 per cent on Friday morning. SSE shares were up 2 per cent.

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The decision comes at a difficult time for networks companies, which are in the sights of the UK’s opposition Labour Party.

Labour this month detailed plans of how it would renationalise energy networks were it to form a government — a proposal that companies such as National Grid have said would spark legal challenges.

Ofgem’s decision also comes a few days after Cadent, the UK’s leading gas distribution network, was hit with a record £44m penalty from Ofgem for a litany of historic failures, including losing 775 blocks of flats from its records, meaning they were not included in its regular maintenance and inspection programme. Cadent has apologised for the past failures.

Network companies are effectively monopolies whose revenues are generated from levies on consumer energy bills. Such charges currently make up about a quarter of a typical bill.

Consumer groups such as Citizens Advice have in the past accused them of making “eye-watering” profits at the expense of households.

On Friday, Gillian Guy, Citizens Advice chief executive, said: “Ofgem has made significant progress so far, but the acid test will be the final outcome. The regulator will face intense industry pressure to water down these measures in the coming months. It must hold its nerve and deliver a price control which is good value for consumers.”

The new regulatory regime — or “price control” — applies to gas and electricity transmission plus gas distribution companies, which include National Grid, SSE, ScottishPower — owned by Iberdrola of Spain — as well as private companies such as Cadent.



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