RIIO2 will see cost of capital at 4%, says Ofgem

Ofgem has dramatically cut the level at which it allows energy networks to recover the costs of financing their networks during the next price review period. From 2020/21 energy networks will have an assumed cost of equity of 4% (subject to final adjustment before the period starts). Ofgem also plans an annual adjustment to the allowed cost of debt. The regulator said the lower overall cost of capital is expected to save consumers £6.5 billion in the five years from 2021

The regulator also announced a ‘significant code review’ - charging reforms intended to squeeze more capacity out of the electricity grids, and to cut the cost to consumers of moving to a smarter, more flexible energy system. This includes incentives for drivers to charge electric vehicles outside peak times and more flexible grid access arrangements for renewable generators.

Last month Ofgem proposed to introduce fixed charges to recover some electricity network charges. This would ensure that those who generate their own electricity at home or on-site pay a fair share of the charges for the grid and reduce the burden on other consumers.

The regulator said the changes could save consumers £45 per year from 2021.

Citizens Advice said, “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.”

Further reading

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

Citizens Advice: Ofgem should pursue potential £4.1 billion network savings by rethinking ‘cost of equity’ calculation

Ofgem promises to get tough on networks as it consults on changes to price review framework

Electricity networks under fire over ‘excess profits’

Citizens Advice criticises Ofgem over “unjustified” energy network profits

OPINION: Energy networks are making too much profit