OFGEM set to impose lower new price-cap on UK energy network suppliers

OFGEM has warned the companies that run Britain’s energy networks that it will impose a price-cap on them in a tougher round of price controls from 2021.

This is because OFGEM says there is clear evidence pointing towards the cost of investment required for networks (cost of capital) being significantly lower. 

Energy networks are monopolies so OFGEM sets controls for the maximum amount the companies can recover to fund the operation and investment in their networks.

Price controls need to evolve to meet the rapidly changing and uncertain needs of an energy system where, for example, renewable generation has gone from 5 per cent of capacity to 24 per cent in 10 years.

There are four RIIO price controls – for gas distribution, electricity distribution, 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 is from 2015-2023.

The overall return that the companies make depends on a range of factors including how they perform against their incentives and how efficiently they spend compared with what OFGEM has allowed. The current forecast rate of return for energy distribution and transmission companies in 2013-2021 controls ranges from 7 per cent to 12 per cent.

Jonathan Brearley, Senior Partner, Networks, added: “OFGEM is working to ensure that customers pay no more than they need to for energy networks while still benefiting from improvements in reliability and service.

“That is why in launching the new round of price controls, we are looking at what lessons we can learn to improve further the RIIO framework for consumers.

An OFGEM spokesman added: “There is great deal of uncertainty about the speed and direction of change: for example, the uptake of electric vehicles and the electrification of heating could have a profound impact on the power network. 

“We need to set price controls that will attract global investment, while ensuring consumers get value for money.  There is strong evidence that investors are increasingly willing to accept lower returns for investing in the very stable regulatory framework that Britain offers. 

“Britain’s energy system is evolving at an unprecedented pace and the scale of this investment challenge is significant. Over one million kilometres of pipes and wires need to be updated and maintained to deliver reliable energy supplies for consumers.

“However, market conditions continue to indicate that returns in the next price controls should be lower.

“By 2020, our price controls will have enabled around £80 billion of investment in transmission and distribution infrastructure since privatisation, while reducing network costs by 17 per cent over the same period.”

 

 

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