Energy regulator proposes halving returns for networks' next controls

Energy regulator, Ofgem has proposed to hack returns for energy networks in their next price controls (RIIO2) to “unprecedented low levels” with a near 50% cut for gas and power transmission companies and gas distribution companies in England, Scotland and Wales compared to the previous price controls.

Unveiling the regulator’s initial proposals for the 2021-26 period of energy network price controls, Ofgem’s chief executive, Jonathan Brearley (pictured), told customers: “Less of your money will go towards company shareholders, and more into improving the network to power the economy and to fight climate change.”

Brearley added: “Given the scale of green investment likely to be needed in future, Ofgem is keeping costs as low as possible for consumers by proposing the lowest ever rate of return on capital for network companies, and pushing companies to be much more efficient in how they run themselves. Ofgem’s stable and predictable regulatory regime will continue to attract the investment Britain needs to go further and faster on decarbonisation.”

Industry reaction was understood to be hostile. One company chief was reported saying: “This was Jonathan Brearley’s first big test as the new Ofgem chief executive and he’s flunked it.”

The regulator has drawn up an investment programme of up to £35 bn with a focus on green growth. 

Ofgem has proposed a cost of equity at 4.2% in consumer price index housing (CPIH) real terms. But the allowed baseline return on equity for network companies is set at 3.95% for a notional company with 60% gearing. The proposed gap, Ofgem said, “represents our judgement, based on past experience and the proposed RIIO-2 incentives, as to the minimum degree to which the companies can be expected to outperform their allowed return on equity.”

Ofgem said the lower allowed return on equity combined with a lower allowed return on debt, would reduce consumers’ bills by £3.3 billion over the five years of the price control period compared to the previous one.