New regulatory framework proposed by Ofgem
Companies responsible for the country's gas and electricity networks could have the amount of money they can return to their shareholders cut, under plans outlined by Britain's energy regulator Ofgem.
7th March 2018 by Networks
Ofgem has set out proposals for a new regulatory framework from 2021 and says these plans will deliver over £5 billion worth of savings for consumers over five years.
Ofgem has proposed that the cost of equity range (the amount network companies pay their shareholders) will go down to between 3% and 5%, from 6 to 7% currently. This is the lowest rate ever proposed for energy network price controls in Britain. Ofgem also proposes to refine how it sets the cost of debt so that consumers continue to benefit from the fall in interest rates.
Ofgem has also proposed cutting the regulatory period to five years from eight years and says it will look at setting up an independent user and consumer group to challenge and monitor company plans.
In a statement, Ofgem said: “In total we estimate this would result in savings of over £5 billion for household consumers (or about £15 – £25 per year on the dual fuel household bill) who pay for the network through their energy bills.
“Ofgem is able to drive forward a tougher regulatory framework for the next price control thanks to a stable, predictable and low risk regulatory regime which ensures consumers benefit from high levels of investment and innovation at the lowest cost. This regime has already delivered significant benefits.”
Jonathan Brearley, Ofgem’s senior partner for networks, added: “The energy sector is rapidly changing and consumers must be confident they continue to get good value for money for the services the networks deliver.
“Ofgem’s stable regulatory regime allows companies to attract investment from around the world on behalf of consumers in Great Britain at the lowest cost. We will capitalise on this by getting network companies to work harder to deliver better value for consumers in the next price controls. This will mean lower costs for consumers of £15 – £25 per year on bills and lower returns for companies.”
Since 1990, network companies have invested around £100 billion in the national and local grids. According to Ofgem, power cuts have almost halved since 2001, while customer satisfaction with local networks has improved significantly.
Ofgem says that networks must step up their use of innovation even further to maintain high levels of reliability while enabling support for new technologies such as electric vehicles, electricity storage, and local renewable generation.
In addition to a lower cost of equity and changes to how the cost of debt is set Ofgem’s consultation on options for a new regulatory framework include:
- A default five-year price control instead of the current eight-year period, as predicting some investment needs during the energy transition is harder over a longer period.
- Tougher requirements to put network companies’ business plans for the next price controls under the microscope. This includes setting up independent user and consumer engagement groups to challenge companies’ plans to ensure that they reflect what consumers want and are willing to pay for.
- Wider scope for opening up high value network upgrades to competition across the gas and electricity sectors, building on the success of our tendering regime for offshore links and our recent proposals for the grid upgrade to connect the new Hinkley Point C nuclear power station.
- A targeted innovation support programme to support strategic challenges across the sector and to involve third party inventors and entrepreneurs in trialling new business models.
- Measures to ensure that consumers don’t pay for capacity which is not used.
- Failsafe measures to protect consumers including companies having to share more of the savings they make due to greater efficiency or use of innovation with consumers.
Stakeholders have until May 2 to respond to the proposals. Ofgem will finalise the framework for setting the next price controls in summer 2018. The companies will submit business plans by autumn 2019. Ofgem’s final view on price control allowances will be published by the end of 2020.
The current gas distribution and transmission price controls run from 2013-2021. The electricity distribution price control runs from 2015-2023.
You can read the full consultation here.
David Smith, CEO of Energy Networks Association, said: “Energy networks are the nerve-centre of a smarter, cleaner energy market, responsible for delivering a range of exciting new services for our homes, businesses and communities. Balanced regulation is fundamental to delivering these and the price control system should evolve to suit the changing needs of consumers. RIIO-2 must deliver that whilst being founded on the principles of transparency and stability to provide predictability for investors, innovators and consumers alike.
“We will be working through the proposals announced today, including Ofgem’s opening view on what the cost of equity should be. Customer Engagement Groups will build on our strong track record of customer satisfaction, a greater focus on a whole system approach will help reduce the costs of decarbonisation and maintaining the innovation incentives will be critical to extending Britain’s world leading track record in this area. Network companies look forward to building on the strength of their existing track record under the new price control and working closely with Ofgem in the weeks and months ahead.”
Gillian Guy, chief executive of Citizens Advice, said: “Today’s announcement is a major step forward. These proposals should prevent a repeat of the billions in excess profits energy network companies are making under the current price controls. This means better value for consumers and potentially lower bills.
“The outcome of this consultation will be the acid test for Ofgem. It’s crucial that the regulator holds its nerve and sees through these changes.
“Curbing the ability of energy network companies to make excessive profits, limiting the price control to five years, and ensuring a greater voice for consumers are all measures that should take us closer to a towards an energy market that genuinely works for consumers.”
A spokesperson from National Grid said:”We note the approach outlined in Ofgem’s consultation document and the wide range of options it contains. We also acknowledge the focus on long-term thinking for critical infrastructure, the opportunities for well-run companies to be rewarded for outperforming their targets and the continuing alignment of customer and shareholder interests under the RIIO framework.
“We will continue to work constructively with Ofgem over the next three years to achieve the best outcomes for both bill payers and investors in our vital energy infrastructure.”
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