Power network companies will be able to charge households more than previously expected over the next five years after Ofgem eased a planned clampdown on their profits.
The regulator told Britain’s electricity distribution companies yesterday that they could spend £22.2 billion between 2023 and 2028 on operating their networks and upgrading them ready to cope with increased numbers of heat pumps and electric vehicles.
It said that the charges levied on energy bills to fund this work would remain at around present levels of about £100 per household per year, despite a 17 per cent real-terms increase in annual investment levels, with companies expected to “do more for less”.
However, the settlement is more generous to the companies than Ofgem’s draft proposals in the summer, which would have actually reduced the charges on energy bills.
The returns on investment that the companies can make will still be lower than at present, but higher than originally proposed, after Ofgem increased allowances to reflect rising inflation.
Shares in SSE and National Grid both rose yesterday as analysts said the settlement from the regulator was more generous than expected. In London SSE shares closed up 32½p, or 1.9 per cent, at £17.08½ and National Grid stock closed up 6p, or 0.6 per cent, at £10.14½.
The monopoly companies that own Britain’s gas pipes and electricity wires derive their income from levies on energy bills that are regulated by Ofgem. This settlement relates to the 14 electricity distribution networks that are owned by six companies: SSE, Scottish Power, UK Power Networks, National Grid, Northern Powergrid and Electricity North West.
Ofgem was widely criticised for allowing companies to make too generous profits in the current regulatory period, which runs for eight years to March 2023, with a regulated cost of equity set at about 6.86 per cent. In its draft determination Ofgem proposed cutting this to 4.75 per cent, but yesterday it said it would allow 5.23 per cent.
John Musk, an analyst at RBC Capital Markets, said there had been a “significant softening from Ofgem” since the draft determination, recognising “the changing macro environment since the summer”. The overall cost of capital was “comfortably ahead of analyst expectations”, he said.
Citizens Advice argued that “network profits will still be too high and targets too easy”.
“We believe Ofgem could have gone further and cut at least £1.5 billion more off people’s bills,” Gillian Cooper, head of energy policy at the charity, said.
Electricity distribution network charges account for about £97 on a typical annual household bill at present. The draft proposals could have seen this fall to £85 initially, whereas the final plan announced yesterday will equate to about £92 initially. However, Ofgem expects to approve additional investment during the next five years that will mean the bill levies will remain close to current levels.
The regulator has already increased the total amount that companies can spend between 2023 and 2028 to £22.2 billion compared with £20.9 billion in its draft settlement. That’s still less than the £25.2 billion companies had proposed spending after the regulator demanded greater efficiency savings and disallowed some projects.
Akshay Kaul, Ofgem’s interim director for infrastructure and security of supply, said the investment would enable the expansion of the electricity networks “to meet the growing demand for electricity with millions more electric heat pumps in homes and electric vehicles on the road expected over the coming years”.
“We’ve carefully considered all the work that will be required and set the budget for the networks accordingly, driving the increase in capacity needed for net zero as well as delivering more reliable and resilient networks, at no extra cost to consumers,” he said.
Sharon Graham, general secretary of Unite, the union, said: “Ofgem have utterly failed to protect the public from rapacious energy profiteers. This price review will allow distributors like UK Power Networks to pick bill-payers’ pockets as we all overpay them by at least £1.5 billion in the next five years.”