Ofgem settles on 4% returns, ‘undermining’ gas and network companies

The UK energy regulator believes the decision represents ‘a better balance of risk and return’, despite industry consternation.

UK energy regulator Ofgem has confirmed it will seek to impose a 4 percent cost-of-equity return for electricity and gas transmission and distribution companies, a move it was warned could “jeopardise” investment in the industry.

The decision follows a period of consultation which began in March, when Ofgem first outlined plans to reduce the cost of equity – the amount the networks pay their shareholders – to between 3 and 5 percent. The regulator will now undergo further consultation with the industry, with a final decision expected in May next year.

Ofgem’s proposals for RIIO-2 – set to take effect from 2021 onwards – call for returns at about 50 percent lower than the previous regulatory regime, which it said would save UK consumers £45 ($57; €50) per year.

“We want to cut the cost to consumers for accommodating electric vehicles, renewables and electricity storage, and make sure that all consumers benefit from these technologies,” said Jonathan Brearley, executive director for systems and networks. “This will mean driving a harder bargain with network companies to ensure that households that need it always have access to safe and secure energy at a fair price.”

However, the plans were criticised by the Energy Networks Association, which believes the new price controls fail to acknowledge the challenge of decarbonisation and adopting new technologies.

“Much more work still needs to be done by the regulator to understand the pace of that change, the risks that investors face and how that is reflected in the price control,” said David Smith, chief executive of the group. “As things stand, the proposals could jeopardise the innovation and investment that is critical to delivering these important outcomes.”

The ENA added that the change increases the risks they face and is “undermining efforts by gas and network companies” to modernise the system. The body had previously called for a 5.51 to 6.34 percent return.

Martin Cave, chairman of Ofgem since October, added that the regulator has “learned lessons” from the past and it can change the controls “to protect investors from risks that they are not well placed to manage”.

Companies – particularly the four gas distribution companies – had been making double-digit, or close to, returns under the previous regulatory regime. Investors in the space include Cheung Kong Infrastructure, OMERS, OTPP, Australia State Super and the Cadent Gas consortium led by Macquarie Infrastructure and Real Assets.

The proposals will affect the management of 1 million kilometres of electricity cables and 272,000 kilometres of gas pipelines across the UK.