- Publication date
- 9th July 2020
- Information types
- Policy areas
- Upfront funding of £25 bn with potential for additional £10bn or more so energy networks can deliver more clean energy for consumers
- £630m set aside for green innovation, with capacity for more if needed
- Network companies’ returns nearly halved, resulting in unprecedented value for money for consumers
Ofgem has unveiled proposals for a five-year investment programme of around £25 bn to transform Britain's energy networks to deliver emissions-free green energy for GB along with world-class service and reliability. Investment in the networks that transport energy round GB is likely to rise, to ensure they can deliver clean energy and meet Government targets for a net zero emissions GB. This investment will also help generate green growth and employment.
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.
Jonathan Brearley, Ofgem’s chief executive, said: “Ofgem is working to deliver a greener, fairer energy system for consumers. This is why we are striking a fair deal for consumers, cutting returns to the network companies to an unprecedented low level while making room for around £25 billion of investment needed to drive a clean, green and resilient recovery.
“Now more than ever, we need to make sure that every pound on consumers’ bills goes further. Less of your money will go towards company shareholders, and more into improving the network to power the economy and to fight climate change.
“Ofgem’s stable and predictable regulatory regime will continue to attract the investment Britain needs to go further and faster on decarbonisation.”
In order to further support the green recovery Ofgem has also asked network companies to come forward with additional ideas on bringing forward investment plans in the current price control. Under the proposals Ofgem is allocating £25bn upfront expenditure to maintain and operate GB’s gas distribution, and gas and electricity transmission networks as well as support the growth of green energy.
Ofgem is also proposing to unlock significant additional funding to drive green emissions-free energy and infrastructure upgrades, that companies can access over the next five years as needed. This could see potentially another £10bn or more of net zero investment supported through the price controls, and more if needed. Ofgem will scrutinise every investment and only give the green light to measures that deliver decarbonisation at the lowest cost to consumers.
On innovation, a new Strategic Innovation Fund, together with funding to individual companies for network innovations, will provide £630m to drive research and development into crucial green energy projects, including to help expand the range of possibilities for decarbonising the heat infrastructure, such as hydrogen, with the potential to fund more if needed.
‘Unprecedented’ value for consumers
Ofgem’s proposals nearly halve network companies’ allowed rate of return, so that less of consumers’ money goes towards network companies’ profits, and more towards driving network improvements. This would save £3.3bn over the next five years for gas and transmission sectors alone. In addition Ofgem is proposing to cut over £8bn from companies’ spending plans by setting them stretching efficiency targets and disallowing costs that companies have simply not justified as delivering value for money for consumers. It is now up to the companies to come back and provide more robust evidence on why this expenditure is needed.
Ofgem’s proposals as they stand would lead to an expected £20 fall in network charges on bills per household a year at the start of RIIO-2. This would help offset the increase in investment and charges expected later in the price control.
Ofgem’s analysis and experience shows that, due to stable earnings and a supportive regulatory environment, GB’s energy networks are a low-risk and attractive sector for investors. Strong evidence from water regulation and Ofgem’s offshore transmission regime shows that investors will accept lower returns and continue to invest robustly in the sector.
These proposals are part of Ofgem’s draft determinations for the RIIO-2 price control for transmission and gas distribution network companies. A separate RIIO-2 price control for the Electricity System Operator (ESO) will boost the funding and activities of the ESO to prepare to operate a zero carbon electricity system.
Today’s announcement does not apply to the price control for the electricity distribution sector, which runs from 2023, and on which Ofgem is consulting separately later this summer.
Notes to editors
Delivering value for consumers
- Ofgem’s proposals, based on current market conditions, set a cost of equity at 4.2% (in CPIH real terms) but the allowed baseline return on equity for network companies is set at 3.95% (CPIH) for a notional company with 60% gearing. The proposed gap between allowed return on equity and cost of equity 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.
- This proposed allowed return is almost 50% lower than under the previous price control (RIIO-1) and the lowest ever capital rate for energy network companies. A lower allowed return on equity of 3.95%, combined with a lower allowed return on debt, would reduce costs passed on to consumers by £3.3 billion over the five years of the RIIO-2 price control period (2021-2026) when compared to RIIO-1.
- The savings figures include only the transmission and gas distribution networks over this five year price control, and exclude the electricity distribution networks. The electricity distribution sector price control (ED2) runs two years behind the other sectors and decisions are still subject to further consultation. The measures differentiating allowed return on equity and cost of equity do not apply to the Electricity System Operator (ESO).
- Mechanisms to flex allowances to meet net zero investment needs, with large pots of ‘re-opener’ funding available throughout the price control for larger scale net zero emissions projects. Potential projects indicated by companies could include a motorway charging network for electric vehicles and potential plans to connect renewables along the East Coast, these and other projects are costed by companies at £10bn, but more funding can be considered if necessary.
- A minimum of £630m in innovation funding available for energy companies to do more research and development into green energy, including low carbon alternatives to gas heating such as hydrogen.
- £500m funding to reduce the networks’ own impacts on the environment including visual impacts, emissions from gas transmission compressors, resource use and waste.
- £3bn upfront funding to connect green electricity sources and transmission grid upgrades to make sure the network is resilient and copes well with rising levels of renewable power in our energy mix.
- Increased funding for the Electricity System Operator, to deliver their 2025 commitment "an electricity system that can operate carbon free”.
Safe and resilient network, better service
- Over £6bn funding to maintain, replace and repair network assets, and funding for network resilience (including physical security, IT and cyber-security upgrades) and more could follow in future as needs become clearer.
- Greater protection for consumers against poor service in gas distribution, including doubling consumer payments for failing to meet minimum standards.
- £30m for gas distribution companies to spend on improving service to consumers in vulnerable situations and improve carbon monoxide awareness.
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