Ofgem cuts costs of a smarter, fairer and cleaner energy system

18 Dec 2018 08:54 AM

Ofgem has set out proposals to help deliver a smarter, fairer and cleaner energy system which is fit for the future and saves consumers money.

Ofgem’s proposals for re-wiring the energy system will enable all consumers to benefit from new technology like electric vehicles and renewables at the lowest cost;
Ofgem proposes further cuts to the cost of capital for networks which, together with other reforms, could save consumers £45 per year;
Ofgem also proposes measures to ensure all consumers pay a fair share for network services.

Ofgem has set out proposals to help deliver a smarter, fairer and cleaner energy system which is fit for the future and saves consumers money.

Britain is generating increasing amounts of renewable energy and millions of electric vehicles will be on the roads in coming decades. Homes and businesses in the future will get their power and heat from cleaner energy sources.

Consumers pay for the cost of maintaining and upgrading the networks to enable these changes through their energy bills under Ofgem’s regulatory framework.

Ofgem today has proposed a much lower cost of capital for network companies to raise the billions of pounds of investment needed in the next price control period from 2021. This will result in lower returns for investors and more savings for consumers.

Based on current market conditions and the evidence available, Ofgem’s proposals would set baseline (cost of equity) returns at 4% (under CPIH) - about 50% lower than the previous price controls. Ofgem also proposes to keep adjusting the cost network companies face to borrow (cost of debt) annually so that consumers continue to benefit from the fall in interest rates since the financial crisis. The lower overall cost of capital is expected to save consumers £6.5 billion in the next price controls from 2021 onwards.

Today’s announcement follows Ofgem’s proposals last month to introduce fixed charges to recover some electricity network charges. This would ensure that those who generate their own electricity at home or on-site pay a fair share of the charges for the grid and reduce the burden on other consumers.

In total, these reforms could save consumers £45 per year from 2021.

Alongside the network price controls, Ofgem will press ahead with further network charging reforms to squeeze more capacity out of the electricity grids to cut the cost to consumers of moving to a smarter, more flexible energy system.

This includes incentives for drivers to charge electric vehicles outside peak times, to allow more electric vehicles to be charged from the existing grid. More flexible grid access arrangements could be offered to suit renewable generators. This will help to cut costs by reducing the need for expensive new power lines and stations and free up existing grid capacity for generators and other users.

Jonathan Brearley, executive director for systems and networks, said: “Our proposals for the new network price controls and charging reforms will help build a lower cost, fairer energy system which is fit for this smarter, cleaner future.

“We want to cut the cost to consumers for accommodating electric vehicles, renewables and electricity storage, and make sure that all consumers benefit from these technologies.

“This will mean driving a harder bargain with network companies to ensure that households who need it always have access to safe and secure energy at a fair price.”

Notes to editors

1. The links to policy documents are here:

2. Find out more about energy networks by reading our networks fast facts

3. As part of the price controls, Ofgem sets the cost of capital for network companies. Broadly this is the rate of return that companies pay investors for providing finance. It is based on our assessment of the cost of debt (how much it costs network to borrow) and the cost of equity (how much network companies can pay their investors.)

In the March 2018 consultation on the framework for setting the next price controls, Ofgem proposed a cost of equity range of between 3% and 5% in RPI terms (4% to 6% in CPIH terms), compared with the 6% - 7% (in RPI terms) or 7-8% (CPIH terms) cost of equity range allowed in the current 2013 to 2021 price controls. We are now indicating that – under our current proposals and based on current market conditions – we would set the baseline allowed cost of equity at 4% (in CPIH terms), or 3% (in RPI terms); in other words, at the bottom of the range we indicated in March 2018.

Today’s consultation relates to the controls for gas distribution, gas transmission and electricity transmission which will run from 2021 to 2026. We also set separate price controls for the electricity system operator and for electricity distribution companies. We are not setting out proposals for the electricity distribution sector at this stage. We will consult on arrangements for electricity distribution companies prior to any decisions being made for the sector. This will include consideration of the applicability of the approach taken in other sectors and the specific features of electricity distribution, which may warrant a departure from that approach.

4. Ofgem’s proposals from the next price controls from 2021 also include:

Mechanisms that would limit overall returns to ensure that profits made by companies in the next price control period are fair for consumers.
Giving networks strong incentives which would encourage them to maintain high reliability standards and improve customer service, including for consumers in vulnerable circumstances.
Retaining funding for network companies to use innovation to tackle the biggest research and development challenges facing the energy sector including increased use of electric vehicles, more local production of energy and integrating digital technology.

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About Ofgem

Ofgem is the independent energy regulator for Great Britain. Its priority is to make a positive difference for consumers by promoting competition in the energy markets and regulating networks.

For facts, figures and information about Ofgem’s work, see Energy facts and figures or visit the Ofgem Data Portal.