CMA backs slashed returns for energy networks, but finds Ofgem made ‘errors’

The competition watchdog has upheld energy regulator Ofgem’s plans to slash returns for energy network investors, but added that it made a “number of errors” in other areas.

The Competition and Markets Authority said Ofgem had erred in the way it calculated some of the money that networks will be allowed to charge households over the next five years.

However, in one of the main areas of contention the CMA backed its fellow regulator.

It found no problem in the way Ofgem calculated how much return networks could pay their shareholders to compensate them for the risk of investing in the UK’s infrastructure.

National Grid had warned that if this so-called cost of equity was set too low, it could reduce investment at a time when the UK needs to slash carbon emissions.

But the CMA said the companies had failed to demonstrate that regulators erred in how they set the cost of equity.

Citizens Advice executive director James Plunkett said: “Overall this is a good result for consumers. The CMA’s decision to confirm lower returns is a significant step forward in tackling the excessive profits made by network companies at the expense of their customers.”

In July last year, Ofgem said it would halve the returns that shareholders would be allowed to take, slashing household energy bills by £20 every year.

Networks are monopolies, so their returns are set by the regulator once every five years.

After last year’s decision, the networks turned to the CMA to overrule Ofgem’s calculations.

The CMA had already forced water regulator Ofwat to allow water companies to pay higher returns to shareholders.

And on Wednesday the competition watchdog did side with the energy networks on some points.

It said Ofgem was wrong to impose a mechanism that National Grid – one of a number of complainants – had estimated would cost it £90 million in revenues.

The energy regulator thought that networks were likely to outperform during the next five-year regulation period. It therefore took this into account when assessing the amount they would be allowed to charge customers.

However, energy networks complained about this so-called outperformance wedge.

National Grid accused Ofgem of basing its findings on an “inconclusive academic report”.

Others said the decision was poorly targeted, discriminatory and would undermine attempts to improve performance, the CMA said.

Ofgem chief executive Jonathan Brearley said: “We welcome today’s provisional announcement by the CMA as an important step forward towards this goal.

“The CMA has found in favour of Ofgem on most grounds of appeal, including the reduction in returns for investors.

“We will continue to engage with the CMA to finalise these price controls, and look forward to working with the industry to deliver efficient investment which will benefit both consumers and the planet.”

National Grid said: “We are pleased to note that it has found in favour of the technical arguments on the outperformance wedge, although we are disappointed that it has not found in favour on the cost of equity.

“We will now review the detailed documents to determine the CMA’s rationale for this provisional determination and will be responding within the statutory timeline.”

The CMA decision is provisional and the regulator is set to make its final decision in October.

SSE said it will also continue to engage with the CMA ahead of the final decision.

David Smith, chief executive of trade body the Energy Networks Association, said: “These are provisional findings which we will now review in detail. It is vital that the final settlement gives network companies a robust framework to invest in a sustainable, net-zero energy system in the most efficient way possible for customers.”