Page 6 - Gi flipbook April 2019

industry & Government news

DIGEST PROFIT CLAMPDOWN

PUTS PRESSURE
ON GAS NETWORK

CREDIT RATINGS

OFGEM CONSULTS ON PLAN THE CREDIT RATINGS of the four

gas distribution networks (GDNs)
in Great Britain are likely to come
FOR ENERGY NETWORKS under pressure as Ofgem clamps
down on profits as part of the RIIO2
settlement, Moody’s has warned.
In a consultation published in
‘BAILOUT’ SCHEME December, the regulator proposed
to the lower the baseline profit
allowance to 2.64 per cent for the
RIIO GD2 price control starting
in 2021. For comparison, the
equivalent figure for 2018/19 is
4.59 per cent.
On this basis, Moody’s said GDNs
could expect to see their nominal
returns fall by 30 per cent and
their real returns by 25 per cent,
according to Utility Week.
The ratings agency also drew
OFGEM REGULATES NETWORK CHARGES attention to Ofgem’s proposals to
limit returns if they exceed the
BRITAIN’S ENERGY REGULATOR is agency, as a bailout mechanism. baseline profit allowance by more
drawing up plans for a bailout scheme If triggered, consumers would than three percentage points. It
for the large monopolies that run provide “potentially unlimited liquidity noted that GDNs are currently
Britain’s gas and electricity networks, to operating companies that would projected to outperform the baseline
which would see consumers provide otherwise be unable to service their by an average of 4.5 percentage
“potentially unlimited” money to debt”, said Graham Taylor, Senior points over RIIO GD1.
companies that run into unexpected Credit Officer at Moody’s. “Gas distribution companies
financial difficulty and are unable to Networks that receive cash — which will face an unprecedented cut in
make debt payments. would be charged to customers via allowed returns and much less scope
Ofgem has proposed slashing roughly their bills — would have up to 10 years for outperformance in RIIO-GD2,
in half the amount network companies to pay it back. putting increasing pressure on cash
such as National Grid, Cadent and Ofgem told The Financial Times flows and interest coverage,” said
Northern Gas Networks should be that the proposal, which is open to Graham Taylor, Senior Credit Officer
able to pay their investors from 2021, consultation, is an alternative to at Moody’s.
reports The Financial Times. setting higher returns for all networks,
In December, Ofgem, which regulates which it believes, would be “very costly
network charges by evaluating the cost for consumers”.
of work that needs to be carried out by In the “unlikely event” that a
companies and what would be a fair network company experienced
return, proposed a baseline cost of “unexpected financial downsides” and
equity — or how much networks can pay had to access the scheme, the regulator
their investors — of about four per cent insisted they would face a number of
based on current market conditions restrictions. These would include not
from 2021, down from 7-8 per cent being able to make dividend payments,
currently. This new regime will apply submitting a payment plan to Ofgem
to all gas networks and the electricity and potentially having a representative
transmission companies. of the regulator sit on its board.
However, Ofgem has admitted lower Ofgem said: “If we conclude that
returns may mean companies have companies are adequately financeable
“less headroom” over their costs of debt without such a mechanism, it may not
to deal with any unexpected problems. be introduced.”
In a 216-page technical document, it The proposal is likely to reignite MOODY’S PREDICTS CASH FLOW
has proposed creating what has been debate around the sector, which has PRESSURES FOR GDNS
described by Moody’s, the credit rating come under scrutiny recently.

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News.indd 1 14/03/2019 14:19