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Ofgem backs down in fight with UK energy companies over returns

UK energy

Ofgem backs down in fight with UK energy companies over returns

Regulator seeks compromise after backlash from groups such as National Grid and SSE

Utilities had threatened to bring a case to the Competition and Markets Authority after Ofgem’s July cuts proposal © AFP via Getty Images

Britain’s energy regulator will cut returns that network companies can make by less than initially proposed as it seeks to defuse a row with the monopolies that manage the country’s gas and electricity infrastructure.

Energy network groups such as National Grid and SSE will be permitted a headline annual rate of return of 4.3 per cent for the five years from April 2021, Ofgem said on Tuesday. That is a sharp drop from the 7 to 8 per cent allowed under a regulatory regime that has been in force since 2013 but an improvement on the 3.95 per cent announced five months ago.

Ofgem’s first proposal sparked a backlash among the network companies, which claimed that setting returns at that level would undermine their ability to deliver reliable services and overhaul Britain’s energy system to deliver the government’s 2050 net-zero emissions target.

They had threatened to appeal against the decision to the Competition and Markets Authority. National Grid and SSE did not rule out a potential appeal following Tuesday’s announcement, although they are likely to wait until the CMA delivers its final determination on returns for water companies, expected in mid-February.

Jonathan Brearly, chief executive of Ofgem, said the regulator would work collaboratively if the energy network owners went to the CMA but added that it was “not about appeasing companies but getting on with the job”.

The regulator gave the green light to greater investment to help deliver clean and reliable energy over the five years of £30bn, up from £25bn, with a further £10bn under consideration for future green energy projects, such as offshore wind farms. It added there was “no limit on the additional funding that could be provided” for viable clean energy investments.

The companies had provided 22,000 pages of extra evidence to justify the increases in permitted returns and investment, Ofgem said.

Customers are set to save £2.3bn on their bills over the five years, equivalent initially to about £10 a year on an individual customer’s bills, down from £20 in July’s proposal. Customer network charges come in at about £250 a year, although Ofgem’s “price control” rules apply to £169 of those costs.

Alistair Cromwell, acting chief executive of consumer charity Citizens Advice, called the move to cut the “excessive profits” of network operators “genuine progress”. However, he added that Ofgem “could have gone further in limiting shareholder returns”.

Those savings will be secured by Ofgem demanding greater efficiency, as well as lowering the companies’ returns to shareholders by 40 per cent.

“We are reducing the amount paid to shareholders so that they are closer to current market levels,” said Mr Brearley. “This means that companies can attract the vital investment we need whilst making sure that consumers don’t pay more than is necessary to achieve this.”

SSE’s share price rose 2.6 per cent and National Grid added 1.7 per cent in morning trade in London on Tuesday.

However, not all companies were convinced that Ofgem had revised the cap on returns upwards enough at a time when massive investment was needed to achieve the UK’s climate change ambitions, after Prime Minister Boris Johnson unveiled a 10-point green recovery plan last month.

“We remain concerned that Ofgem’s proposals on the headline rate of return will not attract the global investment our transmission business requires if we are to support the clear net zero ambitions,” said Keith Anderson, chief executive of ScottishPower, a subsidiary of Spanish utility Iberdrola.

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