The new price controls set the revenue monopoly network owners can earn from charges to consumers.
OFGEM has confirmed that the default length of the next controls from 2021 will be five years, compared with the current eight years. There is no update to the 3%-5% cost of equity range (the amount the companies can pay their shareholders) at present.
This is the lowest rate ever proposed for energy network price controls in Great Britain.
The watchdog estimates this would result in savings of over £5 billion for household consumers (or about £15 – £25 per year on the dual fuel household bill).
OFGEM will extend the scope for opening up high value network upgrades to the benefits of competition across the gas and electricity sectors in the next price controls. To signal its intent Ofgem has confirmed that National Grid can build the grid upgrade to connect the new Hinkley Point C nuclear power station.
However, OFGEM will set the revenue National Grid can earn from the upgrade based in part on its experience in cutting the costs of connecting offshore wind farms to the grid by tendering the ownership of these links.
Jonathan Brearley, OFGEM executive director for systems and networks, explained: “Today we have set out our plans which will bring in tougher price controls with lower expected returns for network companies. This is part of our ongoing programme to ensure that consumers get reliable and secure power supplies at a fair price.
“As part of this continuous drive to deliver value for consumers we are using a new benchmarking approach to cut the costs of connecting the new Hinkley Point C nuclear power station. This is another example of how we are evolving regulation to deliver the upgrades to our power network while ensuring the impact on bills is kept as low as possible.
OFGEM’s decision also confirms that new independent user groups and customer engagement groups will be set up by each of the companies to give consumers a stronger voice in how the price controls are set.
For the first time open hearings will take place in the spring of 2020 where companies’ spending plans will be scrutinised.
Neither of the Big McTwo – Scottish Power nor SSE – provided comment on the new rules.
But Omar Rahim, chief executive of blockchain and AI energy solutions company Energi Mine, commented:
“This is a long overdue step in the right direction by OFGEM for fixing a perpetual problem in the UK energy market.
“For far too long, the Big Six have been incentivised to sell the most energy they possibly can, at the highest price they possibly can, at the direct expense of the consumer. This has meant multiple price rises in recent years that are frequently unrelated to the real price of energy.
“For example, in April this year British Gas raised prices by 5.5%, after already raising prices by 12.5% in September 2017.
“The timing of this new length of price control coincides perfectly with news from earlier this month that a UK energy price cap has been approved by MPs. The Domestic Gas and Electricity (Tariff Cap) will require OFGEM to cap both standard variable and default energy tariffs.
“In addition to helping protect 11 million consumers, this move will encourage greater efficiency and competition among energy providers and hopefully open up the market to smaller scale local generators.
“The technology is there to match customers with smaller providers and facilitate a P2P system of power distribution independent of the dominant energy companies. The traditional model of large, centralised power stations generating the vast majority of the UK’s electricity will, in the coming decades, become a relic.”
31 Jul 2018