Ofgem’s RIIO2 proposal on cost of capital: the industry responds

David Smith, chief executive, ENA: “It’s important that the public and the country as a whole benefit from the changes that are sweeping across the country’s energy system, but 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.

“Energy network companies are building a smarter, more efficient, cleaner energy system that is fit for the British public, so we can all benefit from things like more electric vehicle chargepoints to help improve our air quality and a lower-carbon gas grid to heat our homes. But as things stand, the proposals could jeopardise the innovation and investment that is critical to delivering these important outcomes. Britain’s people and businesses risk missing out.”

Frank Mitchell, chief executive, SP Energy Networks: “SP Energy Networks welcomes that Ofgem has published its RIIO 2 sector consultation which is the next step in the process of the RIIO Electricity Transmission price control. The document is almost 1,000 pages long and our teams of experts will now consider this consultation in detail.  It is essential that Ofgem strikes an appropriate balance between customers and investors at this critical next stage of decarbonising our economy in its future price controls to encourage the necessary investments.”

Gillian Guy, chief executive, Citizens Advice, ”Energy network companies have had it too good for too long. Ofgem’s commitment to a tougher price control should curb the excess profits networks have been allowed to make. This is good news for people as this should result in lower bills. It is vital now that Ofgem continues to hold its nerve in the face of the inevitable push back from industry.

“The widespread adoption of electric vehicles and smart appliances in our homes will bring benefits for many people, but will also put different demands on the network. It’s crucial that everyone benefits from these innovations and that no-one is left behind. We want to make sure everyone, especially vulnerable people, can make the most of these products and services and are protected from undue costs.”

Graham Taylor, lead analyst, Moody’s (in a general ratings review), ”We are downgrading SSE’s ratings because we expect a sustained period of higher debt and lower cash flows as a result of difficult trading conditions across several divisions, including recent gas trading losses, acute competitive and regulatory pressures in retail energy supply and suspension of the capacity market, as well as the likelihood of falling returns in regulated networks.

…”Although a regulatory consultation published by Ofgem on 17 December 2018 increases the likelihood that allowed returns will fall significantly from April 2021, regulated networks are still expected to provide more stable and predictable cash flows than SSE’s competitive activities.”

Richard Hewitt, gas industry consultant, ”This will be entertaining. 4% Cost of Equity with the Fed raising US interest rates to 2.5% yesterday. If anyone thinks they can operate an energy network at a time of significant social change over a period of 5 years and make a reasonable profit with a COE of 4% please stand up. We might just be heading for a Competition referral on this one. Plent of work to do on both sides of this argument.”

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