Ofgem proposals will hit network firm cash flows Fitch Ratings warns

Cuts to equity returns proposed by energy regulator Ofgem “will significantly reduce energy networks companies' cash flows,” according to ratings agency Fitch Ratings.


Ofgem said its proposal would halve returns. In a recent note Fitch warned that the watchdog’s proposals could reduce total real equity returns by more than 50%, “including outperformance on total expenditure (totex), outcome delivery incentives (ODIs) and the cost of debt.”


Fitch said were the proposals implemented networks would need to adjust dividend policies and take other measures related to costs and debt “to maintain credit metrics consistent with their current ratings.”


Ofgem proposed to reduce real equity returns for gas and electricity networks by around 40% from current levels) for the 2021-2026 price control period and to allow only about 80% and 60% of requested totex for the distribution and transmission sectors, respectively.


Fitch said Ofgem’s regulation of energy networks was, “predictable and independent, despite the reduction in returns and the scope for outperformance.” It said the regulator follows an evidence-based approach” to responses to consultations.


The ratings agency said elements of Ofgem’s proposals were “designed to reduce risk.” These, Fitch said, included a cost of equity indexation, a "true-up" of real price effects (cost inflation), caps and collars on outcome delivery incentives.