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OFGEM GOES AFTER GAS PROFITS

Ofgem has confirmed plans to slash returns for energy network “Lowering the cost of capital for
companies. Here, we take a look at how the gas industry and network energy companies will put
other players have responded to the announcement money back into consumers’ pockets
while service standards are required
to remain high. Our new price control
fgem has announced it will years of the RIIO-2 price control period, for networks will pave the way for a
move forward with plans to compared to RIIO-1. cheaper, smarter and more sustainable
reduce the cost of equity for However, Ofgem says the final energy system and is a key step in our
energy network companies, savings for consumers will depend on a journey to a low carbon future.”
O close to 50 per cent below its number of other factors like operating
previous level. expenditure, which it will make a final The industry response
It has confirmed its methodology for decision on next year after companies In response to Ofgem’s announcement,
calculating the next round of network have submitted their business plans. National Grid said: “On cost of equity,
price controls between 2021 and 2026, Under the new price control we recognise Ofgem has made
called RIIO-2, which the regulator framework, companies will also some corrections to its calculations
says will deliver a “smarter and more be required to increase support to and continues to consult on the
sustainable” energy network that will consumers in vulnerable situations, outperformance wedge. We remain
come at a lower cost to consumers. for example by strengthening licence disappointed with the proposed range,
Energy Live News reported that, if the conditions and incentivising companies which we believe does not fairly reflect
agreed methodology were to be applied to take vulnerability into account when the level of risk borne by networks.
today, Ofgem would set the allowed interacting with their customers. “In the context of the role that
baseline return on equity at 4.3 per cent The regulator says its new plans will networks will play in enabling the
in a cost of equity range of 4-5.6 per support the “decarbonisation of power, transition to a more efficient and
cent – the lowest ever capital rate for heat and transport” and a “smarter decarbonised energy system, we believe
energy network companies. energy system” and each company’s this is not in the long-term interests of
The regulator sets the cost of capital environmental action plan will be consumers. We will continue to engage
for energy companies, which is the rate taken into account when funding constructively with Ofgem to reach an
of return they can pay investors, the allowances are set. appropriate RIIO-2 outcome for the
cost of which is passed onto consumers. Jonathan Brearley, Executive Director benefit of all stakeholders.”
A lower return on equity combined for Systems and Networks added: ENA Chief Executive David Smith
with a lower allowed return on debt “Our proposals are on track to deliver
are expected to reduce costs passed to a tough, fair settlement that strikes a
consumers by £6 billion over the five better deal for consumers.

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