Ofgem ups planned investor returns for energy networks

Ofgem will not slash the money that energy networks can give to their shareholders by as much as first indicated, after an initial plan to halve returns met resistance from the companies themselves.

The energy regulator said it would allow network companies to pay a return on equity of 4.3% to their investors between 2021 and 2026, down from high returns of between 7% and 8% that are currently allowed.

The decision makes an assumption that the amount actually paid to shareholders will reach around 4.55% if companies meet high incentive targets.

It is Ofgem’s final say on the matter, and is slightly higher than the 3.95% that energy networks were told they could be facing in Ofgem’s preliminary decision in July.

The decision, taken with other measures that Ofgem has proposed, will save customers about £10 per year on their energy bills. It includes billions of pounds for green investments.

Alistair Cromwell, acting chief executive of Citizens Advice, called the decision “genuine progress”, even while arguing that Ofgem could have gone further in limiting returns.

“For too long network companies were able to make excessive profits, not because they were efficient firms, but simply because previous price controls were too generous,” he said.

“This settlement will, as we argued for, make sure companies can access funding for essential infrastructure projects quickly, while also making sure consumers’ money is well spent.”

Three of the biggest energy networks, SSE, National Grid, and Scottish Power, as well as the Energy Networks Association, said they needed more time to assess Ofgem’s full decision.

But Scottish Power and SSE both expressed concern or disappointment with the plan.

Scottish Power boss Keith Anderson said: “This is a large and complex document and we will now take our time to analyse it in full and consider our next steps.

“We remain concerned that Ofgem’s proposals on the headline rate of return will not attract the global investment our transmission business requires if we are to support the clear net zero ambitions of the UK and Scottish Governments.”

Ofgem chief executive Jonathan Brearley said: “Our £40 billion package massively boosts clean energy investment. This will ensure that our network companies can deliver on the climate change ambitions laid out by the Prime Minister last week, whilst maintaining world-leading levels of reliability.

“These costs must fall fairly for consumers. We are reducing the amount paid to shareholders so that they are closer to current market levels. This means that companies can attract the vital investment we need whilst making sure that consumers don’t pay more than is necessary to achieve this.”

The networks reacted with fury in July after they were told the returns may be halved, accusing Ofgem of putting climate goals at risk.

At the time they threatened to fight the regulator if it stuck with the 3.95% returns. The energy networks themselves had accepted that the returns would be slashed, but were generally hoping they would be set at between 5% and 6%.

An industry source said on Tuesday that a large part of the Prime Minister’s 10-point plan to green the economy will be built on the grid, and investment is key.

“This is too important and the next 10 years are key. Boris Johnson is coming up with a massive plan, and we need to make sure the network is ready for it,” they said.

In July, both SSE and Scottish Power said they might ask the Competition and Markets Authority for a ruling after Ofgem’s final decision.

The CMA has already this year gone against a plan proposed by Ofwat, the water regulator, which would similarly have slashed household bills, in this case by around £50 per year.

In a provisional finding in September, the competition watchdog said that Ofwat had been too strict in limiting the amount water companies can invest in resilience and reducing leaks.

That decision put the returns for water companies at around 5%, although it set a midpoint of 4.5%.

SSE’s transmission arm said it is “very disappointed that Ofgem has not fully reflected the robust evidence – particularly that from the Competition and Markets Authority (CMA) provisional findings – in setting the financial parameters.”