Ofgem confirms plans to boost investment in local electricity grids

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Ofgem has confirmed its plans to boost investment in local electricity grids needed to support the growth in electric cars, small scale renewables, storage and cleaner forms of heating.

The regulator set out today its working assumptions on the financial package that will be applied for the next round of price controls for local Electricity Distribution Network Operators (DNOs) starting in April 2023.

The new price controls for the DNOs, known as RIIO-ED2, seek to ‘significantly’ boost green investment to local networks and drive ‘a major change’ in the way Britain travels, heats and powers homes to support government climate change targets.

It also seeks to enhance the role of DNOs to create more flexible local grids that can balance demand and supply for electricity more effectively by connecting more small scale renewables and storage.

The regulator has also confirmed it will ‘significantly’ lower the proportion of money that goes back to network company shareholders.

If applying the methodology using current market rates, Ofgem would set the allowed baseline return on equity at 4.4% CPIH (a 4.65% cost of equity, when taken together with expected 0.25% income from quality / cost incentives).

This is on average a third lower than under the previous price control (which is set at 7% cost of equity when adjusted to a comparable basis). This is a working assumption, and not a decision on the final allowed returns for the 2023 price control.

Ofgem has also set the rates of return consistent with current market levels, in line with the average for EU regulators.

This seeks to ensure that Britain’s stable and reliable sector remains highly attractive to investors.

Taken together with Ofgem’s other working assumptions, the regulator reports, including on debt and depreciation policy, these changes would, all other things being equal, reduce companies’ average annual revenues compared to current levels.

According to the regulator, such changes would lower network charges on bills by around 9%, or around £2bn, over the RIIO ED2 period compared to current arrangements.

The Price Control seeks to drive DNOs to be proactive in ensuring the local grids are ready to cut greenhouse gas emissions, as according to Ofgem they are best placed to know where new investment is needed to accommodate increasing demands.

However, in preparing their spending plans they will be required to maximise network capacity through existing and new technologies that provide system flexibility, such as battery storage or smoothing peaks in demand, that can limit the need for expensive new network capacity.

More information about this announcement is available on the Ofgem website.