energy news

Ofgem Sets Controls On Regional Electricity Networks


9th December, 2009

Regulator sets tough investment-led price controls on regional electricity networks

Investment up 40 per cent on the last five years’ spend to £7.2 billion, including sustainability funding (£6.7 billion capex plus £500 million low carbon fund) New £500m fund paves the way for large-scale trials of smart grids and other technology required in a low carbon economy The two most efficient companies can spend the sum they asked for, but overall the bids were cut by 8 per cent as Ofgem ensured value for money for consumers Ofgem sets the companies tougher targets for network reliability, and customer service

The final proposals will govern the revenue of the 14 Distribution Network operators (DNOs) for five years from April 2010. With an average increase in electricity bills of £4.30 a year, householders will get better customer service, improved reliability and a greener electricity supply. The new controls will also open the way for much-needed local power generation and other developments to help tackle climate change.

The regulator’s Chief Executive Alistair Buchanan said: “Our proposals are tough on inefficiency and poor service but are fair in allowing the companies to invest to replace ageing network assets and in improving the environment. The controls provide great opportunities for companies which are more efficient and excel at providing what their customers want - but they will penalise poor performers.

“We have listened to consumers’ expectations of top quality service, reliability, fair prices and environmental improvement for today and for the future.”

As part of the price control Ofgem sets the cost of capital which is the benchmark return on investment for each DNO. Ofgem has set a 4.7 per cent actual (called vanilla) weighted average cost of capital (using a pre-tax cost of debt and a post-tax cost of equity). Our assessment, assisted by Price Waterhouse Coopers, is that low risk utilities like the DNOs can adequately finance themselves at this rate. Additionally, we have set robust incentive mechanisms that give companies significant opportunities to boost overall returns. Alternatively, if DNOs fail these incentives their shareholders, and not consumers, will carry the costs of underperformance.

The proposed investment returns plus the £6.7 billion allowed spend ensure that DNOs can fund the capital expenditure both to replace ageing equipment – some of which is more than 50 years old, and to link the networks to renewable generation.

The DNOs will have an opportunity to bid for cash from a new £500 million fund earmarked for innovative projects that will combat climate change. This Low-Carbon Fund (LCF) will be available to DNOs and partner companies to use over the next five years to help to pave the way for local generation, growth in electric vehicle use and other projects that will be needed to meet our climate change targets.

Ofgem chairman Lord Mogg said: “This fund breaks new ground in regulation. Its objective is to encourage companies to be more innovative with new technologies and commercial arrangements. This will allow energy companies to play a full part in combating climate change. The fund demonstrates Ofgem’s commitment to meeting the challenge of a low carbon economy.”

Ofgem has also reformed the treatment of DNO pension costs to strike a fairer balance between customers, employees and shareholders. This package is inline with incentives faced by other regulated utilities and private companies.



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