Shares in National Grid PLC (LSE:NG.) and SSE PLC (LSE:SSE) were searching for direction on Thursday as investors reacted to energy watchdog Ofgem's initial decision on the financial framework for the next regulatory period starting in 2026.
The Sector-Specific Methodology Document (SSMD) sets the rules for the so-called RIIO3 period from April 2026 through to March 2031 for electricity and gas transmission as well as gas distribution.
Analysts at Barclays say the key point is the cost of equity, which has initially been set by Ofgem in a range of 4.57-6.35%, so the midpoint of 5.43% is "slightly light" compared to the consensus forecast of 5.75%.
This is the early view from Ofgem, with the submission date for companies' business plans in mid-December, followed by draft determinations from Ofgem in June/July 2025 with a final decision late next year.
The cost of equity, as well as being lower than expected, is higher than water regulator Ofwat's 4.8%, the Barclays analysts add.
They note that switching to nominal debt will increase cash flow but slow growth, and suggest investors should expect moderate returns, better than water utilities but with lower growth potential.
"We (as do investors) see water assets as higher risk than power, but Ofgem and Ofwat clearly believe the opposite," the analysts said.
In its response, National Grid said it is "pleased to see Ofgem continuing to recognise the need for an appropriate financial framework that retains and attracts the capital the sector requires as it embarks on a big step up of investment".
NG shares rose 1% in early trading before flattening, while SSE oscillated between negative and positive, standing up 0.3% after just over an hour.