Ofgem lifts networks' cost of capital but still undercuts Ofwat

Ofgem has proposed a smaller fall in allowed returns for energy network firms in its 2021-26 price control than it indicated in December 2018.

The energy regulator increased its working assumption (a decision will follow business plan submissions) on the pre-inflation allowed return in RIIO-2 from 2.64% to 2.88%.

The decision could have a bearing on Ofwat’s final decision on cost of capital for water companies. It plans to publish an updated view in July, when it publishes draft determinations for the non fast tracked firms, and a final position at final determinations in December.

Moody’s noted: “The allowed return [from Ofgem] remains below that proposed by Ofwat for the 2020-25 price control in water, which is 2.8% plus blended CPIH/ RPI inflation, equivalent to around 3.3% plus CPIH inflation. However, in arriving at the allowed return, Ofgem has assumed that companies will be able to outperform due to incentives and cost outperformance, which is a divergence from past practice and the approach taken by Ofwat.”