Energy firms attack plan on renewables and cuts to bills
Some of the UK’s biggest gas and electricity companies have attacked plans by the industry’s watchdog that are designed to save households money on their bills while boosting investment in green energy.
Ofgem said its proposed changes would save consumers £3.3bn a year until 2026, or £20 per customer, by cutting the percentage of investment costs that suppliers can pass on to households. Under the plan, suppliers will have to halve the rate of return that they take from their investments in the network. The regulator argues that investments in utilities are inherently low-risk, generating stable returns over many years, and so should attract a lower rate of return than is allowed under current rules.
“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,” Ofgem said.
National Grid, SSE and Scottish Power hit out at the plans, which require them to invest £25bn over five years in improving energy networks and making them more environmentally friendly. Currently about onequarter of the average household’s energy bill goes to pay for the network.
Ofgem’s plans include £10bn for investment in clean energy, with companies encouraged to pitch ideas in order to obtain funding for specific projects. This could include a recently proposed National Grid project to install electric car charging points up and down British motorways, and innovative solutions such as switching the gas grid to run on hydrogen. Ofgem will also set aside £630m to encourage new research and development in green energy.
Dr Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit (ECIU), said the proposals were good news for hard-pressed families and the environment.
“Ofgem appears to have listened to criticism that it hasn’t been pushing hard enough on environmental measures and has been giving the networks – which make up around a quarter of domestic bills – an easy ride,” he said. “Until now there has been lots of talk on innovation from the network companies, but little action on the ground. Linking returns to carbon emissions will give them nowhere to hide, and should ensure that UK resources, such as a world-leading position in offshore wind, are bolstered by smart technologies needed to balance the grid at low cost.”
Some energy network companies, which will see profit margins cut, criticised Ofgem’s plan. National Grid said it would press for changes that incentivise investment and protect consumers ahead of Ofgem’s final decision in December this year.
“We are extremely disappointed with this draft determination, which risks undermining the process established by Ofgem. This proposal leaves us concerned as to our ability to deliver resilient and reliable networks, and jeopardises the delivery of the energy transition and the green recovery,” a spokesperson said.
Meanwhile, SSE said it was “disappointed and deeply concerned”. Rob McDonald, managing director of subsidiary SSEN Transmission, said: “Whilst our stakeholder-endorsed and evidence-based business plan was in step with the government’s low-carbon investment ambition, Ofgem’s first pass at a settlement resembles a worrying return to austerity. Ofgem’s draft determination is a barrier towards achieving net zero and is damaging to the green economic recovery.”
However, the move won support from the chief executive of Citizens Advice, Dame Gillian Guy, who said: “Today’s announcement is another step closer to a price control that stops network companies from overcharging energy customers by billions of pounds. These decisions are extremely technical, but they matter. Ofgem has struck the right balance between shareholder returns and value for money for energy customers, while making sure networks can continue to attract investment.”
Ofgem’s chief executive, Jonathan Brearley, 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 £25bn 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.”
A final decision will be made in December after the companies have had time to make their case.