Ofgem is to significantly lower the proportion of money going to network company shareholders in the next price period as it looks to target more flexible local grids.
The regulator said that if applying its new methodology for the upcoming RIIO-ED2 period to current market rates, the allowed baseline return on equity would be set at 4.4% CPIH (consumer price inflation). This is made up of a 4.65% cost of equity, when taken together with expected 0.25% income from quality/cost incentives.
As such, it is about a third lower than previous price control periods, which set a 7% cost of equity when adjusted to a comparable basis. Ofgem did note that this is still a working assumption and not its final decision.
These changes would reduce companies' annual revenues compared to current levels, and lower network charges on bills by 9%, or around £2 billion over the price period.
Such a change would allow networks to commit to new investment to support the net zero transition, while keeping energy bills affordable Ofgem said.
With 34% of the UK’s greenhouse gas emissions currently coming from surface transport and domestic heating, the need to transition to electric vehicles and heating in particular is growing. This will increase demand on the networks, with Electricity North West predicting there will be 3 million EVs in its area by 2050 for example, while UK Power Networks is expecting 4.5 million by 2030 and Scottish and Southern Electricity Networks is expecting 5 million by 2050.
The new price controls could “pave the way for turning Britain’s streets green, unlocking the investment needed to support the UK, Scottish and Welsh government climate change targets, particularly around the electrification of transport,” said Jonathan Brearley, Ofgem’s chief executive, said.
“We’re driving local electricity networks to help make sure that every watt of energy produced from plant to plug is better used, for example by ramping up their use of battery storage, saving bills and the planet.
“At the same time, these financial arrangements will significantly cut investor returns to make sure consumers pay a fair price for energy whilst networks attract the investment they need to be safe and green.”