UK energy network owners face ‘significantly lower returns’

Energy regulator Ofgem proposes price controls as its CEO calls out Cheung Kong Infrastructure for not sharing gains with consumers.

UK energy regulator Ofgem has warned the country’s gas distribution network owners to expect “significantly lower returns” after proposing price controls that would take effect in 2021.

Ofgem said the cost-of-equity range – the amount the networks pay their shareholders – should be between 3 percent and 5 percent, while it is also considering changes to the cost of debt so that customers benefit from a fall in interest rates. The proposed equity range changes would be the lowest rate ever proposed in Britain, Ofgem said.

The regulator estimates the new price controls would result in savings of £15 ($20.74; €16.82) to £25 per year on the dual fuel household bill, or a total of £5 billion over a five-year period. It cited the “stable, predictable and low-risk regulatory regime” as reasons to drive through “a tougher regulatory framework” for the next price controls. Ofgem added that, due to its price controls, the cost of transporting a unit of electricity around Britain has fallen by 17 percent since the mid-1990s.

In addition to proposing a lower cost of equity, the regulator is also planning to reduce the default price control period from eight years currently to five years, since “predicting some investment needs during the energy transition is harder over a long period”.

Ofgem is also considering further opening the gas and electricity sectors to competition for network upgrades “building on the success of our tendering regime for offshore links and our recent proposals for the grid upgrade to connect the new Hinkley Point C nuclear power station”.

“Ofgem’s stable regulatory regime allows companies to attract investment from around the world on behalf of consumers in Great Britain at the lowest cost,” said Jonathan Brearley, Ofgem’s senior partner for networks. “We will capitalise on this by getting network companies to work harder to deliver better value for consumers in the next price controls.”

In an opinion article for the Financial Times, Ofgem chief executive Dermot Nolan said some networks’ profits were driven more through “changes in global financial trends than outperformance” and criticised Cheung Kong Infrastructure for not sharing such gains with customers. The Hong Kong-based infrastructure investor owns 100 percent of Wales and West Utilities and leads the ownership of Northern Gas Networks alongside Australia’s State Super.

“Ofgem’s regulation requires some of these gains to be handed back to consumers,” said Nolan. “Companies that have benefited should also consider sharing additional gains with consumers, by cutting their bills in the future. Some have already committed to returning a total of £650 million. But Northern Gas Networks and Wales and West Utilities, which are both owned by CKI, have yet to step up.”

The firms declined to respond directly to Nolan’s comments, referring to comments by the Energy Networks Association urging the pricing review “to provide predictability for investors, innovators and consumers alike”.

Ofgem did, however, receive a warning from SP Energy Networks – owned by Spain’s Iberdrola – to ensure investment is not warded off.

“The role of networks is essential to the economy and Ofgem will need to think very carefully about whether their proposals encourage the necessary investment in critical infrastructure that ensures resilience of the nation’s energy supplies and that the UK also realises its low carbon future in transport and heat,” said Frank Mitchell, chief executive of the group.

Stakeholders will be able to respond to Ofgem’s proposals until 2 May, while the regulator expects to finalise the framework this summer.