Fitch: energy networks remain lower risk than water

RIIO-3 draft determinations for UK gas distribution and transmission and electricity transmission networks are more favourable than the water final determinations issued in 2024, according to Fitch Ratings.

In a new report, Fitch maintained its ‘a’ midpoint for the UK energy networks’ regulatory environment, which is one notch above that of the UK water sector. It said this reflects Ofgem’s forward-looking approach to addressing sector risks, through either accelerated depreciation of new gas distribution investments, or through regulatory adjustments supporting cash flow generation for the electricity transmission sector, which mitigate risks associated with the £80bn investment programme.

In assessing the utilities’ regulatory environment midpoint, Fitch mainly considered the transparency and predictability of the regulator, and cost and investment recovery mechanisms. In addition, the cost of equity (at 6% for gas and 5.6% for electricity transmission) sits at the upper end of the sector specific methodology decisions range – exceeding RIIO-2 (5.1% and 4.8% respectively) and the UK water AMP8 allowance of 4.83%.

Fitch said that Ofgem’s one-notch higher midpoint over UK water networks stems from a more balanced risk-return profile with lower revenue at risk for energy networks. It added: "The draft determination for AMP8 in water introduced unnecessary regulatory volatility, which is not the case for energy.”