Ofgem changes fail to ‘offer adequate returns’, National Grid says

National Grid insists that UK electricity and distribution risks are not matched by returns, contrary to Ofgem’s beliefs.

The UK’s National Grid has hit out at UK regulator Ofgem’s recent proposals to lower returns in the country’s electricity and gas transmission sector, saying the proposed changes “will not offer adequate return for investors”.

The company’s comments come just over two weeks after Ofgem’s consultation on the lowest cost-of-equity range ever proposed to the sector ended, with a finalised framework expected in the summer ahead of a 2021 implementation. However, National Grid is wary the changes will not provide an appropriate risk-return profile.

“On fair returns and financeability, we have supported variable sharing factors but have challenged Ofgem’s proposed cost of equity range of 3 to 5 percent as too low for the risk of a transmission company and will not offer adequate return for investors,” the group said in its annual report yesterday. National Grid added that it does not believe Ofgem is taking into account the full range of evidence.

National Grid’s view clashes with remarks made by Dermot Nolan, chief executive of Ofgem, when revealing the new regime in March, in which he stated that “returns across companies have been higher than we expected and do not reflect the low level of risk these companies face”.

Ofgem’s new regulatory regime proposals – dubbed RIIO-2 – suggested the cost-of-equity range be reduced from its current 6 to 7.2 percent range. Ofgem’s initial proposals come amid a backdrop of rising consumer bills and promises by Jeremy Corbyn, leader of the UK’s opposition Labour Party,  to nationalise the sector. RIIO-2 is set to deliver savings of between £15 and £25 per year, per consumer.

National Grid said yesterday it had achieved a 13.1 percent return on its UK electricity transmission business and a 10 percent return on its gas transmission stream. National Grid sold its remaining 25 percent stake in the Cadent gas distribution network for £1.2 billion ($1.6 billion; €1.4 billion) at the beginning of this month to the Macquarie-led consortium which first invested in the network in December 2016.