Ofgem aims to halve network returns while giving flexibility to invest in delivering Net Zero: National Grid warns it has gone too far

Ofgem’s draft determination of network price controls for the coming five years  ”Risks undermining the process”, said National Grid. The company, which owns gas and electricity transmission networks and the system operator, said Ofgem’s proposed settlement “leaves us concerned as to our ability to deliver resilient and reliable networks, and jeopardises the delivery of the energy transition and the green recovery.” It vowed to press Ofgem to make changes between now and the final determinations in December and “come forward with a regulatory framework that both incentivises investment and protects consumers.” 

Energy regulator Ofgem  proposed to halve the rate of return allowed for electricity and gas transmission and gas distribution network owners during the five-year price control period starting in 2021. Plans for the electricity distribution networks (DNOs) will be set out in two years time.

The regulator said its proposed allowed return (3.95% for equity) would be almost 50% lower than under the previous price control (RIIO-1). The “lowest ever” rate for energy network companies – which the regulator said was in line with recent returns for water utilities and offshore electricity transmission assets – would reduce costs passed on to consumers by £3.3 billion over RIIO-2, Ofgem said, adding that the decision would put pressure on companies to reduce costs. The regulator meanwhile promised innovation funding and ‘re-opener’ options to help companies facilitate the move to net zero and manage uncertainties. The regulator planned a slightly different regme for the NG ESO, with an allowed return on equity of 5.28%, because it has “unique risks and a smaller asset base”.

Lobby group the Energy Networks Association also said it was concerned that the proposals could inhibit companies’ ability to raise  investment funding. It said, “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. In the last few weeks, the Prime Minister and Chancellor have stated the need for much of this investment to be brought forward, delivering economic and societal benefits now as we recover from the pandemic.

“We will work with Ofgem over the coming months to highlight these concerns ahead of the final settlement being published in December.”

RenewableUK’s head of policy and regulation, Rebecca Williams also warned: “These proposals won’t bring forward the investment that the Government says it wants to kickstart a green economic recovery.” But she praised reopener proposals around new technologies such as renewable hydrogen.

Frank Mitchell, chief executive of SP Energy Networks, said: “This was Jonathan Brearley’s first big test as the new Ofgem chief executive and he’s flunked it.

“Instead of backing Britain he has put Britain in the slow lane of leading economies. We were ready to invest more to create green jobs, increase opportunities for the under 25s through apprenticeships, accelerate zero carbon for our customers and back Britain. Over 80% of our customers support our plans. Jonathan has let our customers and communities down and he is taking Britain back to austerity.”

Citizens Advice, meanwhile, which has argued that networks have been allowed to make large returns at the expense of consumers, said the announcement was “another step closer to a price control that stops network companies from overcharging energy customers by billions of pounds.” It added, “These decisions are extremely technical, but they matter. Ofgem has struck the right balance between shareholder returns and value for money for energy customers, while making sure networks can continue to attract investment.”

Read Ofgem’s draft determinations here