Ofgem finalise proposals on future network funding

11 December 2020   By Dr Lucy Brown, Editor

Regulator has softened approach to shareholder returns in final proposals for funding the energy network over the next five years.

It means customers can expect a £10 annual cut in bills as shareholder profits are cut, although this is half what Ofgem initially proposed.

The proposals confirm up to £40bn of funding will be made available to invest in a greener and fairer energy system.

However, network companies including SSE remain unconvinced by the final determinations.

gas and electricity energy
Credit: ALDECA studio/Shutterstock.com

Lower shareholder returns

One of the key areas of contention when the initial proposals were revealed by Ofgem in July 2020 was how much network shareholders would receive as returns on their investment.

Ofgem's original recommendation would have resulted in a £20 drop in every customer's annual energy bill, not a huge amount but one that would cap shareholder returns at 3.9%.

Energy networks including National Grid, Scottish Power and SSE were critical of this, saying that lowering the rate of investment returns would put off potential investors.

SSE threatened to appeal to the Competition and Markets Authority (CMA) if Ofgem didn't rethink the proposals, something that would've held up the implementation of the funding proposals.

Now Ofgem has settled on a £10 saving per household every year by capping shareholder returns at 4.3%. This is still substantially less than the 7-8% allowed in recent years.

While consumer groups like Citizens Advice have mostly welcomed the final decision, networks remain unhappy, with SSE saying they are disappointed by the regulator's conclusions.

The compromise is likely to be welcomed by the Business, Energy and Industrial Strategy (BEIS) Committee who warned Ofgem last month to try and avoid CMA action.

Funding framework

Ofgem's final determinations for network price controls between 2021 and 2026 also includes the following headline figures:

  • Upfront investment of £30bn to develop a greener and fairer energy system
  • Innovation funding of £660m for green energy and customers in vulnerable situations
  • Funding of £132m to support customers in vulnerable situations
  • Over £3bn of upfront funding for green energy projects and facilitating the move towards net zero
  • At least £10bn to be made available for further potential investment

There will be a statutory consultation on licence modifications in due course, and SSE have already signalled their plan to continue working with Ofgem and other industry professionals to resolve their differences.

This could mean further delays if agreement can't be reached.

Net zero

These proposals, also known as the RIIO 2 framework, have been developed to limit the impact of energy networks on the environment at the same time as addressing the problems facing vulnerable energy customers.

Back in February 2020, Ofgem published their Decarbonisation Action Plan, detailing nine areas which need to be addressed if net zero is to achieved in the UK by 2050.

That's partly why their RIIO 2 proposals include around £3.6bn of funding to support green energy in the UK and help achieve net zero.

The £660m of innovation funding delivered via the Network Innovation Allowance and Strategic Innovation Fund will go towards helping networks transition to green energy systems, although the detail on this will necessarily be determined later as networks work on their plans.

Ofgem have retained £10bn in potential funding for investments into net zero that could be unlocked at any point before 2026 to adjust to any policy or technology changes.

They also say they won't set a limit on future funding for green energy, saying if companies are able to justify the money they want to spend, the funding will be there.

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