Energy is an essential service, and we all pay for the pipes and wires of the energy network through our bills. To ensure we get value for money and reliable services, we set price controls for the monopoly companies that own the networks. These set limits on how much money network companies can earn, while allowing them enough scope to attract investment and deliver the services we expect.
Unprecedented energy investment is needed in the next decade if the UK is to achieve the governments’ ambitious net zero carbon emissions targets and support a green recovery from COVID-19.
That’s why, in setting out our proposed price control determinations for the transmission and gas distribution networks last week, we made it clear that we want to see less of consumers’ money going towards network companies’ profits and shareholders, and more towards transforming the networks. The new controls will start in April next year and run to 2026.
Network companies deliver a good service for GB, with power cuts half the EU average. However, we think they can go further and faster on decarbonising energy, while maintaining one of the world’s most reliable energy systems and delivering value for consumers’ money.
We’ve proposed to remove £8bn from network company spending plans where they have not presented value for money for consumers.
Network companies will argue such cuts could slow green growth and investment in building the low carbon system we need. However, the reductions we’re proposing mostly focus on network running and maintenance costs (such as company back-offices or replacing transformers and switchgear), which we consider will have little to no effect on the green recovery in the short-term or progress towards net zero in the longer-term.
In fact, we are proposing to allow 90% (over £3bn) of the upfront net zero funding sought by network companies for areas such as connecting new renewable generation, upgrading the transmission grid and enhancing the ability of the Electricity System Operator (ESO) to operate a zero-carbon electricity system. Network companies have not asked for any additional upfront funding for green investment beyond this in their plans because they have not yet been able to identify any ‘shovel-ready’ projects. However, we have provided for a further £10bn or more funding that could be called upon by companies as needs become clearer throughout the five years of the price controls through ‘reopeners’.
We recognise the need to ensure decision-making processes to agree new projects will need to be as agile as possible, and we will work with industry to achieve this objective. This is very much a consultation. We have clearly set out the reasons for our proposals. But we remain open to being persuaded through new or better evidence whether upfront allowances should be different, including on asset health.
We’ve proposed a reduction in the allowed rates of return for investors, resetting these to levels consistent with current evidence and market conditions (as recommended recently by the National Audit Office, amongst others).
Doing so will free up over £3bn from consumer bills for green investments over the next five years. It will cut average household bills by about £20 a year at the start of the price controls and help keep network charges affordable longer-term as investment rises later in the decade to help fight climate change.
The evidence makes clear that networks can attract investment at much lower rates of return. In the uncertainties of the current economic climate and beyond, our stable, predictable and transparent regulatory regime makes GB network companies an extremely attractive proposition for investors around the world.
Scare stories of investors fleeing to other countries because rates of return are too low don’t stack up. Analyst estimates suggest overall returns in the price controls are within the range of allowed or earned returns in other regimes in Europe, with some being lower (such as Germany) and some being higher (such as Spain).
Furthermore, there is strong evidence that investment continues without difficulty for similar returns to our proposals in the regulated UK water sector. Our offshore transmission regime shows too that investors are willing to accept lower returns while continuing to invest robustly in the sector.
We recognise that building a flexible, low-carbon, digitised energy system is a significant challenge. Our proposals will help network companies invest £25 billion upfront in necessary infrastructure, including the £3bn of green investments mentioned above.
They also include £630 million or more for innovation funding towards green energy research and targeted support for vulnerable consumers, alongside £500 million to reduce the networks' own impact on the environment.
We consider it likely that overall levels of investment in networks will continue to rise as we progress through the decade, to meet government net zero targets. This is why we’re inviting network companies to bid for further pots of funding of £10 billion or more through a ‘reopener’ mechanism. It will give companies the flexibility to bring forward strategic projects as required to power the green recovery and help get us to net zero in the smartest and most cost efficient way. This could include, for example, supporting projects to connect 40 GW of offshore wind in the North Sea, powering a motorway charging network and testing the potential for hydrogen-based heating.
In an economic downturn, it’s more important than ever to bring forward investment and ensure we deliver at the lowest cost when many are struggling financially. We don’t want to wait for the next price controls to start to help power the green recovery from COVID-19. We have asked the Energy Networks Association to lead a project across the networks to identify investment that can be accelerated within the existing price controls. We are also asking network companies to tell us through consultation responses if any further good value green investment could be brought forward within our proposals.
Another core aspect of our controls in helping achieve net zero is the separate price control for the ESO. This will boost the ESO’s funding and responsibilities to prepare the grid for taking on much more renewable power to operate a zero-carbon electricity system. We’ll discuss this in more detail in the coming weeks as part of our price control consultation blog series, and through our forthcoming webinars.
I have no doubt there will be tough discussions ahead. We stand ready to work with the industry and other stakeholders to seize the opportunities for a greener, fairer energy future.
We’re consulting on our price control proposals until 4 September, and will make our final decision in December. For full details of our network price control proposals, and to have your say on the plans, visit our RIIO-2 proposals overview page.
A separate price control will apply to the electricity distribution sector, running from 2023. We will consult on this separately later this summer.