Ofgem proposes ‘lowest ever rate of return’

The draft determination has sparked the ire of the UK energy market after allowed returns were set between 3.9% and 4.2%.

UK energy regulator Ofgem has sought to nearly halve the allowed returns by electricity and gas transmission and gas distribution companies, in what it described as “the lowest ever rate of return on capital for network companies”.

The draft determination for the RIIO-2 framework has cut allowed returns to a range of 3.9-4.2 percent, a slight revision on a determination last year proposing allowed returns of 4-4.3 percent. RIIO-1 set allowed returns at 6-7 percent, in a regulatory regime beginning in 2013. RIIO-2 will run from 2021 to 2026.

Ofgem said its proposals are pushing for a cleaner and greener system and said the move would generate about £25 billion ($31.3 billion; €27.7 billion), with the potential of further funding, to deliver an emissions-free network. Ofgem said these proposals would lead to a fall in about £20 per year on consumer bills.

“Ofgem is working to deliver a greener, fairer energy system for consumers,” said Ofgem chief executive, Jonathan Brearley. “This is why we are striking a fair deal for consumers, cutting returns to the network companies to an unprecedented low level while making room for around £25 billion of investment needed to drive a clean, green and resilient recovery.”

The Energy Networks Association, the trade body for those regulated by Ofgem, said the proposals don’t go far enough to encourage green investment and “could significantly inhibit their ability to do so”.

“We need to attract significant investment in a competitive global market in order to reduce the UK’s carbon emissions, tackle the climate emergency and do so at least cost to customers,” stated David Smith, chief executive of the ENA.

SSE, the utility which manages the networks in Scotland, indicated it could appeal to Britain’s Competition and Markets Authority, as was the case with four water companies in response to Ofwat’s proposals in February.

In October last year, Ofgem admitted that allowed returns for RIIO-1 were set too high, partly due “to avoid the perceived risk of under-investment”. It emerged that seven of the 14 companies achieved double-digit returns in the regulatory period to date.