Proposed regulatory price controls for UK electricity distribution will offer lower returns for investors and higher efficiency targets for providers.
The UK energy regulator unveiled a £21bln upgrade to the country's electricity networks and insisted the overhaul will not mean a spike in energy bills for Britain's already squeezed households.
Ofgem unveiled the £20.9bn package to modernise the network and said the funding means operators will not have to pass on the costs to consumers.
Of the listed distribution companies SSE PLC (LSE:SSE) said the proposals are “tough and stretching”, while National Grid PLC (LSE:NG.) suggested it wanted to change some aspects before the final decision at the end of the year.
The five-year plan, covering April 2023 to March 2028, aims to build smarter regional energy grids, including £2.7bn of upfront funding to boost capacity, with the regulator saying the “flexible funding arrangements” will enable investment in the grid to increase with demand.
"These are challenging times, and this is the path out of relying on expensive and polluting imported fossil fuels and moving to a home-grown energy system, that exploits the best of modern technology to level out demand and reduce costs for consumers,” Jonathan Brearley, chief executive of Ofgem, said.
The regulator said it will ensure costs are “kept to a minimum while allowing funding for the improvements needed”.
It will introduce a framework with a threshold for the maximum profits that network operators can earn from charges on consumers’ energy bills, with “tough” efficiency requirements for network companies and “lower returns for investors”.
Network operators usually recover their allowance from network charges on energy suppliers, which typically pass those costs onto customers through their energy bills.
The latest package aims to transform energy grids so they are smarter and more responsive to peak demand through cleaner energy sources on the path to net zero, rather than relying on expensive fossil fuel imports.
The regulator said it expects bill-payers to benefit from a “small drop” in network charges due to energy efficiency savings and by leveraging private investment.
“New smart gadgets could draw energy from the grid at cheaper rates when demand is low or it's sunny and windy, balancing out power use, and saving consumers money,” Ofgem said.
Ofgem will consult on the draft proposals by 25 August and a final determination is due in December.
SSE said for its Scottish and Southern Electricity Networks Distribution (SSEN Distribution) arm the initial determination represents an increase of 18% its equivalent allowances in the previous regulatory period.
SSE said “work is required to ensure the final settlement fully reflects customer and stakeholder needs”.
National Grid said: “We are working through the detail of these draft determinations, in particular the proposed reduction in totex across each operating company.
“As we move towards final determinations, we will work hard with Ofgem to ensure we agree a price control that meets the outcomes our customers have asked of us, including resilient and reliable networks, as well as enabling the transition to net zero.”
Analysts at AJ Bell said utility companies did not appear to be “jumping with joy” but that it was a sensitive political issue with consumers under considerable financial pressure from a sharp rise in energy bills.
“Energy providers would argue they are under pressure to invest heavily to improve infrastructure, make sure the supply network is resilient, and that everything is being done to hit net zero targets.
“On the other hand, the regulator has long had its eye on the amount of money these companies make, and whether their profits and dividends should be so high.”
The analysts added: “The regulator will have to tread a fine between making sure the country’s energy network is robust and efficient, while also being fair to the operators that they can do their job and make a small bit on the side. It’s the size of that cake that remains the sticking point.”
Shares in National Grid were up 0.7% at 1,077.16p by midday, while SSE, which is looking to sell a 25% stake of its distribution business, was down 2% at 1,632.5p.