Ofgem ups planned investor returns for energy networks

Ofgem will not slash the money that energy networks can give to their shareholders by as much as first indicated, after an initial plan to halve returns met resistance from the companies themselves.

The energy regulator said it would allow network companies to pay a return on equity of 4.3% to their investors between 2021 and 2026, down from high returns of between 7% and 8% that are currently allowed.

The decision makes an assumption that the amount actually paid to shareholders will reach around 4.55% if companies meet certain incentive targets.

It is Ofgem’s final say on the matter, and is slightly higher than the 3.95% that energy networks were told they could be facing in Ofgem’s preliminary decision in July.

The decision, taken with other measures that Ofgem has proposed, will save customers about £10 per year on their energy bills. It includes billions of pounds for green investments.

Ofgem chief executive Jonathan Brearley said: “Our £40 billion package massively boosts clean energy investment. This will ensure that our network companies can deliver on the climate change ambitions laid out by the Prime Minister last week, whilst maintaining world-leading levels of reliability.

“These costs must fall fairly for consumers. We are reducing the amount paid to shareholders so that they are closer to current market levels. This means that companies can attract the vital investment we need whilst making sure that consumers don’t pay more than is necessary to achieve this.

“We are also ensuring that £132 million is earmarked to support the most vulnerable in society, including carbon monoxide initiatives and funding new connections for those most struggling with their bills.”

The networks reacted with fury in July after they were told the returns may be halved, accusing Ofgem of putting climate goals at risk.

At the time they threatened to fight the regulator if it stuck with the 3.95% returns. The energy networks themselves had accepted that the returns would be slashed, but were generally hoping they would be set at between 5% and 6%.

In July, both SSE and Scottish Power said they might ask the Competition and Markets Authority for a ruling after Ofgem’s final decision.

The CMA has already this year gone against a plan proposed by Ofwat, the water regulator, which would similarly have slashed household bills, in this case by around £50 per year.

In a provisional finding in September, the competition watchdog said that Ofwat had been too strict in limiting the amount water companies can invest in resilience and reducing leaks.

That decision put the returns for water companies at around 5%, although it set a midpoint of 4.5%.