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Ofgem unveils £25bn investment but networks label new proposals ‘deeply concerning’

£3bn of the investment will be used for connecting renewables and upgrades.

£3bn of the investment will be used for connecting renewables and upgrades.

Ofgem has unveiled a £25 billion investment programme to upgrade Great Britain’s energy networks over the next five years.

The investment will help to transform the country’s energy networks to deliver green energy, and ensure reliability during the RIIO-2 price control period. The regulator has said that this will help to generate green growth and employment, along with helping Britain transition to net zero.

Announced in the regulator's RIIO-2 Draft Determinations Overview today (9 July), this funding will be used to maintain and operate gas distribution and gas and electricity transmission networks, as well as driving green energy.

Of this, £3 billion will be used for connecting renewables and upgrading the grid to cope with them.

As well as the upfront funding, Ofgem has earmarked an additional £10 billion of net zero investment that will be supported through the price controls to help deliver clean energy to customers.

Jonathan Brearley, Ofgem’s chief executive, said the company was 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 £25 billion of investment needed to drive a clean, green and resilient recovery.”

Ofgem will halve network companies’ allowed rate of return, dropping it to 3.95%, the lowest rate ever. This will save £3.3 billion over the next five years, helping to fund investment and lower consumer bills by £20 per household per year from the start of the period in 2021.

“Now more than ever, we need to make sure that every pound on consumers’ bills goes further,” continued Brearley. “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.”

The changes follow a report by the National Audit Office in January finding that network profits had been higher than necessary following Ofgem errors during RIIO-1.

Additionally, Ofgem is proposing cutting over £8 billion from companies spending plans. It will set them efficiency targets and disallow unjustifiably costs to help drive value for consumers. It has said that it is now up to the companies to come back and provide more robust evidence on why this expenditure is needed.

This forms one of Ofgem’s four key objectives for networks throughout the period. This also includes greening the networks by reducing their carbon footprint by 26%, improving customer service including £30 million funding for vulnerable customers, and making the network safer and more reliable including spending £6 billion on maintenance and repair for aging infrastructure.

There is a particular drive for network companies to commit to the net zero transition, after Ofgem’s RIIO-2 Challenge Group stated it was "disappointed" with the lack of proactivity in network companies in January. In a report released by the group, it said that apart from National Grid ESO, no company has been “genuinely proactive in shaping the path to net zero".

Many welcomed the news this morning, such as Dr Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit.

“Shifting focus to cutting carbon at the same time as keeping a lid on network profits is good news for hard-pushed families and for efforts to get the UK back on track to meet its climate targets,” he commented. “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".

Ofgem has launched a new Strategic Innovation Fund that will provide £630 million for research and development for green energy projects. This will including looking into decarbonising heat infrastructure and the possibility of using hydrogen.

Dr Marshall continued: “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.”

However, some have been more critical of Ofgem’s draft proposals for RIIO-2, with Scottish and Southern Electricity Networks Transmission (SSEN Transmission) stating it was “disappointed and deeply concerned".

Rob McDonald, managing director of Transmission at SSEN, 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 damaging to the green economic recovery.

“At present the draft settlement does not strike the right balance for all stakeholders and without significant changes during the consultation period, there is a real risk that the critical investment in Britain’s electricity networks will be unnecessarily slowed down by an appeal process via the CMA, which is not in any stakeholders’ interests”.

The company said that it will now consider the Draft Determination in detail, and work with government and Ofgem to address the issues during the consultation period, which is set to run till the end of the year when the final settlement will be released.

The Energy Networks Association echoed SSEN’s concern, with David Smith, chief executive of the group, saying that the proposals could "significantly inhibit" the networks' ability to raise investment funds that will allow them to drive the transition to net zero.

While it will take some time to review in detail the proposals, Smith said, the ENA is "concerned that they do not go far enough" to encourage investment evident.

“Network companies listened to their customers and stakeholders and put forward plans informed and influenced by their extensive engagement through focus groups and events held around the country,” continued Smith. “The plans put forward by network companies would make this possible with little to no impact on the average energy bill.

“We need to attract significant investment in a competitive global market in order to reduce the UK’s carbon emissions, tackle the climate emergency and do so at least cost to customers. In the last few weeks, the Prime Minister and Chancellor have stated the need for much of this investment to be brought forward, delivering economic and societal benefits now as we recover from the pandemic.”

For full details and how to respond to Ofgem’s consultation, see here.


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