The companies that own the UK’s local electricity distribution networks are facing big cuts to their profits after the energy regulator told them to invest more in maintenance and improvements on Wednesday.
Ofgem has published plans to cut baseline annual rates of return to 4.75 per cent for the five years from April 2023, down from about 6.8 per cent under the current regime.
The regulator said the proposals would enable £20.9bn to be spent on maintenance and measures to boost the resilience of the grid, such as the replacement of wooden pylons, while keeping customer charges stable at about £100 per year.
The move will hit six monopolies including ScottishPower, Northern Powergrid and UK Power Networks, which own the local distribution networks that transport electricity from the high-voltage national transmission grid to homes and businesses.
The proposals are expected to be contested by electricity network companies, with a final decision from the regulator expected by the end of the year.
Jonathan Brearley, chief executive of Ofgem, said: “Ofgem’s job is to ensure energy networks have achievable and affordable plans that will attract the investment needed for a more resilient energy network and achieve the government’s net zero ambition at the least cost to the consumer.”
Ofgem, which is already under pressure for its handling of the energy crisis, decides how much the networks can charge customers because the companies provide an essential service with no competition.
All their revenues and any investment in their networks, including electricity pylons and other infrastructure, are funded by customer bills.
Electricity networks have argued that they need to be able to pay for upgrades to the grid to cope with the transition to green energy, including millions of electric vehicles and small-scale renewable projects.
The Energy Networks Association, which represents the operators, said the settlement would “need more work” to deliver the government’s net zero decarbonisation targets.
The energy networks are also under pressure following critical reports of their handling of Storm Arwen, which left tens of thousands of people without power for as long as 10 days in November and December last year.
An investigation by Ofgem found that almost three-quarters of the damaged poles were more than 40 years old, suggesting a lack of investment in the network had contributed to the problems.
The regulator is keen to ensure that the companies become more efficient rather than respond by raising consumer bills. In the last regulatory period, the electricity networks underspent their allowance by about 2 per cent enabling them to retain some of the excess for payments to shareholders.
Average household bills are expected to increase by £800 in October to £2,800, meaning they will have risen 119 per cent in a year. The cost of the electricity and gas transmission and distribution networks accounts for about a fifth of customer bills.
Gillian Cooper, head of energy policy for Citizens Advice, said Ofgem was “right to challenge networks to operate as efficiently as possible”.
“Networks have been allowed to make excessive profits for too long and they’re still able to make too much,” she added.
Shares in companies, including SSE and National Grid, which owns Western Power Distribution, climbed by about 1 per cent immediately after the announcement as the rates were better than analysts expected.