Ofgem's £25bn plan puts climate goals at risk, say energy firms
Energy companies have accused the regulator Ofgem of putting Britain’s climate goals at risk by clamping down on returns for green investors in an effort to shave £20 a year from home energy bills.
Ofgem has proposed halving the returns that companies can make over the next five years through a £25bn green investment plan designed to prepare Britain’s energy infrastructure for a low-carbon future.
Ofgem said the lowest ever energy investor returns, which are paid for through energy bills, will offer a fair deal for consumers and energy company shareholders as Britain undertakes huge investments in electric vehicle charging and grid upgrades to connect new renewable energy and battery projects.
Ofgem’s chief executive, Jonathan Brearley, said: “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.”
The proposed returns would be half what energy network companies currently earn for upgrading and maintaining Britain’s energy pipes and wires, after MPs and consumer groups had criticised the regulator for allowing the companies to pocket “eyewatering” profits at the expense of consumers.
But major energy companies including National Grid, SSE and Scottish Power have warned that setting investor returns at 3.95% – down from the current 7% to 8% – could slow the pace of Britain’s energy transition by making the UK less attractive to investors.
There is also concern over Ofgem’s decision to cut the total investment allowed in new electricity grid projects to between £5.9bn and £9.1bn for the next five years, which falls short of the £9.6bn invested over the last five years. The proposed limit is well below the spending proposed by the industry at £10.8bn to prepare for a surge in power demand from electric cars, hobs and heat pumps.
Nicola Shaw, the executive director of National Grid, said it was “very disappointing” that the regulator had chosen a “short-term gain” for customers while putting “all the work still needed to reach net zero at real risk”.
Ofgem’s plan aims to save £3.3bn of company spending from being passed on to energy consumers between 2021 and 2026. This could mean that energy bills fall by £20 a household in 2021 from where they might have been, though the long-term reduction in bills could drop to £10 a year depending on how much is spent on additional green energy projects over the next five years.
But Keith Anderson, the chief executive of Scottish Power, said the plans are “so far out of step” with the government’s ambition to create a netzero carbon economy by 2050 that they may “slams the brakes” on a green economic recovery, “or even put it in reverse”.
He warned that Scottish Power’s parent company, Spain’s Iberdrola, may opt to invest more in the other countries within its global portfolio, which includes France and the US, rather than earn lower returns in the UK.
Brearley said there is no merit to the argument put forward by companies that the investment returns proposed by the regulator will slow down a shift towards green energy.
“Ofgem are here to deliver a greener and fairer energy system, and we are passionate about supporting the green economic recovery,” he said. “Quite frankly, at this stage of the process, this is the sort of thing that companies often say.”
Brearley said the regulator has undertaken “extensive analysis” to determine “a fair balance between investment and customers” including the rate of return which investors earn from investing in any projects in other countries.
The regulator will consult with companies again before delivering its final decision later this year, but may be forced to defend the plans to the UK’s Competition and Markets Authority (CMA) if it does not budge.
Energy network companies are expected to appeal against the current rate of return with the CMA, which could further delay progress on green energy investment plans, supply chain contracts and green-collar jobs growth.
“My job is to look at the evidence, make sure we make the right decision, and then stand firm,” Brearley said. “We are confident that we have got that balance right.”