Ofgem plans to cut electricity distributors’ return on equity by a third from 2023

Citizens Advice has welcomed an announcment from regulator Ofgem that it would cut allowed returns for electricity distribution network operators (DNOs) by a third in the upcoming price review period, saying “In the face of appeals by other energy networks over their price control, Ofgem has stood its ground by continuing to limit shareholder returns. This is a win for consumers. Energy networks have made billions in excess profits during the current price control and it is vital this isn’t repeated.”

Nine electricity transmission networks and gas networks have sought leave to appeal from the Consumer and Markets Authority over Ofgem’s decisons on their price settlement.

Ofgem said that on current market rates it would set the allowed baseline return on equity at 4.4% CPIH (a 4.65% cost of equity, with expected 0.25% income from  incentives). The previous price control allowed 7% cost of equity when adjusted to a comparable basis.

Ofgem said “We estimate the proposed cost of equity will be broadly comparable with other European regulatory regimes for the same period, based on the analysis undertaken to support the Final Determinations for the Gas Distribution & Transmission (GD&T) sector,” and this would make sure the sector remains highly attractive to investors. It said the change would lower network charges on bills by around 9%, or around £2 billion, over the RIIO ED2 period compared to current arrangements.

Jonathan Brearley, Ofgem’s chief executive, said: “We’re driving local electricity networks to help make sure that every watt of energy produced from plant to plug is better used, for example by ramping up their use of battery storage, saving bills and the planet. 

“At the same time, these financial arrangements will significantly cut investor returns to make sure consumers pay a fair price for energy whilst networks attract the investment they need to be safe and green.”

Further reading

Nine networks appeal price determinations

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Government asks CMA to rethink UK’s competition regime

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