- Publication date
- 7th March 2018
- Information types
- Policy areas
- Ofgem proposes significantly lower range of returns for investors
- Tougher approach would deliver savings of over £5 billion to consumers over five years
- Ofgem will capitalise on stable regulatory regime to ensure consumers benefit from high levels of investment, innovation and reliability at lowest cost.
Ofgem has today set out proposals for a new regulatory framework from 2021 which is expected to result in lower returns for energy network companies and significant savings for consumers.
This includes a cost of equity range (the amount network companies pay their shareholders) of between 3% and 5%, if we had to set the rates today. This is the lowest rate ever proposed for energy network price controls in Britain. Ofgem also proposes to refine how it sets the cost of debt so that consumers continue to benefit from the fall in interest rates.
In total we estimate this would result in savings of over £5 billion for household consumers (or about £15 - £25 per year on the dual fuel household bill) who pay for the network through their energy bills.
Ofgem is able to drive forward a tougher regulatory framework for the next price control thanks to a stable, predictable and low risk regulatory regime which ensures consumers benefit from high levels of investment and innovation at the lowest cost. This regime has already delivered significant benefits.
Since 1990, network companies have invested around £100 billion in the national and local grids, operating one of the most reliable networks in Europe. Power cuts have almost halved since 2001, while customer satisfaction with local networks has improved significantly. Under our price controls, the cost of transporting a unit of electricity around Britain has fallen by 17% since the mid 1990s, relative to the retail price index.
Networks must step up their use of innovation even further to maintain high levels of reliability while enabling support for new technologies such as electric vehicles, electricity storage, and local renewable generation.
In addition to a lower cost of equity and changes to how the cost of debt is set Ofgem’s consultation on options for a new regulatory framework include:
- A default five-year price control instead of the current eight-year period, as predicting some investment needs during the energy transition is harder over a longer period.
- Tougher requirements to put network companies’ business plans for the next price controls under the microscope. This includes setting up independent user and consumer engagement groups to challenge companies’ plans to ensure that they reflect what consumers want and are willing to pay for.
- Wider scope for opening up high value network upgrades to competition across the gas and electricity sectors, building on the success of our tendering regime for offshore links and our recent proposals for the grid upgrade to connect the new Hinkley Point C nuclear power station.
- A targeted innovation support programme to support strategic challenges across the sector and to involve third party inventors and entrepreneurs in trialling new business models.
- Measures to ensure that consumers don’t pay for capacity which is not used.
- Failsafe measures to protect consumers including companies having to share more of the savings they make due to greater efficiency or use of innovation with consumers.
Jonathan Brearley, Ofgem’s senior partner for networks, said: “The energy sector is rapidly changing and consumers must be confident they continue to get good value for money for the services the networks deliver.
“Ofgem’s stable regulatory regime allows companies to attract investment from around the world on behalf of consumers in Great Britain at the lowest cost. We will capitalise on this by getting network companies to work harder to deliver better value for consumers in the next price controls. This will mean lower costs for consumers of £15 - £25 per year on bills and lower returns for companies.”
Stakeholders have until May 2 to respond to the proposals. Ofgem will finalise the framework for setting the next price controls in summer 2018. The companies will submit business plans by autumn 2019. Ofgem’s final view on price control allowances will be published by the end of 2020.
Notes to editors:
1. RIIO-2 framework consultation
2. What is a price control?
Energy networks are regional monopolies so Ofgem sets controls for the maximum amount the companies can recover to fund the operation and investment in their networks. There are four price controls - for gas distribution and electricity distribution (the lower pressure gas mains and the lower voltage electricity networks), gas transmission and electricity transmission (for the high voltage electricity grid and the high-pressure gas main). The current gas distribution and transmission price controls run from 2013-2021. The electricity distribution price control runs from 2015-2023.
What is the cost of capital?
The cost of capital is a key component in the price controls. Ofgem sets the rate of return that we think energy networks need to pay their shareholders (the cost of equity) and the rate the companies need to pay to banks or other sources for debt financing (the cost of debt). The cost of capital has an influence on the overall returns of network companies. The companies’ returns also depend on how they perform against the range of financial incentives in the price control that reward improvement and penalise poor performance in customer service, connections, reliability and other areas.
3. How much do the networks cost on bills?
As of March 2018 network costs are around £250 of a typical dual fuel bill of around £1100. See information on network costs and facts and figures showing what the networks do for customers here.
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