Ofgem Proposes Halving Energy Network Companies’ Returns

The energy market regulator has proposed slashing the profits companies like National Grid and SSE can make operating the UK’s electricity and gas networks, to the protests of those firms.

Ofgem has indicated that from April 2021 network companies will be limited to a baseline return rate of 3.95%, down from the 7-8% profit they were allowed to run under the pricing regime in force since 2013.

That’s less than the rate of 4.3% Ofgem initially proposed last year for RIIO-2 price control, in effect from 2021 to 2026.

The lower rate of return will save £3.3 billion over the next five years, some to be invested in network upgrades and some passed onto consumers as savings. Energy networks, which operate and maintain the UK’s electricity grid and gas pipes, charge energy suppliers for use of that infrastructure, transmission costs which are passed onto consumers as part of their energy bills.

“This so that less of consumers’ money goes towards network companies’ profits, and more towards driving network improvements,” Ofgem said.

The price controls also call for £25 billion of investment by the firms by 2026, with the potential to approve £10 billion more.

But the outcry from the pinched firms was swift, as they warned watered-down returns would compromise their ability to deliver reliable services and transform the energy system to meet the UK’s net-zero goal, including accommodating elevated electricity demand as EVs and heat pumps hook up to the grid.

Keith Anderson, chief executive of Scottish Power, suggested Ofgem was headed for “a huge regulatory fight,” with network companies lodging cases with the Competition and Markets Authority (CMA).

National Grid said it is “concerned as to our ability to deliver resilient and reliable networks” and suggested the price controls “jeopardise the delivery of the energy transition and the green recovery.” SSEN, the networks arm of SSE, said it was “deeply concerned” by the proposals. Shares in both firms tumbled following the announcement of the proposals Thursday, with National Grid down 6% and SSE down 3% by lunchtime.

However, Ofgem’s stricter price controls follow years of outrage about the profits network companies are turning. Citizens Advice alleged that network companies were made an “eye-watering” £7.5 billion “unjustified” profits between 2009 and 2017. The National Audit Office has also alleged that Ofgem like electricity networks rake in at least £1 billion more than necessary, at the expense of consumers’ bills. Former Labour leader Jeremy Corbyn cited the high profits of these firms when calling for the UK's energy system to be nationalised.