GB Price Control Proposal Irks Networks

Britain’s energy regulator, Ofgem, has firmed up its price controls proposal for energy networks, first outlined in July, in what is a rolling consultation that extends into 2019.

Any final decision taken around 2Q 2019 will be effective from April 2021 for gas networks and the National Grid (NGrid) power transmission system, and from April 2023 for regional power distributors. 

Ofgem said December 18 that under its latest 'RIIO-2' proposal that its recommended cut to the cost of capital allowed could, with other changes, save consumers £45 ($56.70)/yr from 2021. A much lower cost of capital for network companies to raise investment from 2021 though would "result in lower returns for investors and more savings for consumers," it said, and is expected to save consumers £6.5bn ($8.2bn) in the next price controls from 2021 onward.

Based on current market conditions and the evidence available, Ofgem’s proposals would set the baseline cost of equity returns at 4% below CPIH (the consumer price index that includes a measure of owner-occupiers’ housing costs) - so about 50% lower than the price control currently in force from 2013 to 2021.

Commenting on the latest RIIO-2 proposal, David Smith, CEO of the Energy Networks Association, said: "Much more work still needs to be done by the regulator to understand … the risks that investors face and how that is reflected in the price control."

NGrid said it would examine the document carefully but added: "We are disappointed with the proposed financial package, in particular the cost of equity range ... In order to deliver the major capital programme required across our networks in a rapidly changing energy market, we need to ensure the regulatory framework also provides for fair returns to shareholders and enables us to continue to deliver world class networks for consumers."

NGrid also said that it will provide a detailed response in early 2019, adding that the consultation is expected to conclude in 2Q 2019 with the RIIO-2 price control commencing in April 2021.