Ofgem proposes £25 billion to make networks greener

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OFGEM has unveiled proposals for a five-year investment programme of around £25bn to transform Britain’s energy networks to deliver emissions-free green energy for GB.

Investment in the networks that transport energy round GB is likely to rise, to ensure they can deliver clean energy and meet Government targets for a net zero emissions GB.

This investment will also ‘help generate green growth and employment.’

Jonathan Brearley, Ofgem’s chief executive, commented on the announcement: “Ofgem is working to deliver a greener, fairer energy system for consumers.

“This is why we are striking a fair deal for consumers, cutting returns to the network companies to an unprecedented low level while making room for around £25 billion of investment needed to drive a clean, green and resilient recovery.

“Now more than ever, we need to make sure that every pound on consumers’ bills goes further.

“Less of your money will go towards company shareholders, and more into improving the network to power the economy and to fight climate change.

“Ofgem’s stable and predictable regulatory regime will continue to attract the investment Britain needs to go further and faster on decarbonisation.”

Given the scale of green investment likely to be needed in future, Ofgem is keeping costs as low as possible for consumers by proposing the lowest ever rate of return on capital for network companies, and pushing companies to be much more efficient in how they run themselves.

In order to further support the green recovery Ofgem has also asked network companies to come forward with additional ideas on bringing forward investment plans in the current price control.

Under the proposals Ofgem is allocating £25bn upfront expenditure to maintain and operate GB’s gas distribution, and gas and electricity transmission networks as well as support the growth of green energy.

Ofgem is also proposing to unlock significant additional funding to drive green emissions-free energy and infrastructure upgrades, that companies can access over the next five years as needed.

This could see potentially another £10bn or more of net zero investment supported through the price controls, and more if needed.

Ofgem will scrutinise every investment and only give the green light to measures that deliver decarbonisation at the lowest cost to consumers.

On innovation, a new Strategic Innovation Fund, together with funding to individual companies for network innovations, will provide £630m to drive research and development into crucial green energy projects, including to help expand the range of possibilities for decarbonising the heat infrastructure, such as hydrogen, with the potential to fund more if needed.

Ofgem’s proposals nearly halve network companies’ allowed rate of return, so that less of consumers’ money goes towards network companies’ profits, and more towards driving network improvements.

This would save £3.3bn over the next five years for gas and transmission sectors alone.

In addition Ofgem is proposing to cut over £8bn from companies’ spending plans by setting them stretching efficiency targets and disallowing costs that companies have simply not justified as delivering value for money for consumers.

It is now up to the companies to come back and provide ‘more robust evidence’ on why this expenditure is needed.

Ofgem’s proposals as they stand would lead to an expected £20 fall in network charges on bills per household a year at the start of RIIO-2.

This would help offset the increase in investment and charges expected later in the price control.

Ofgem’s analysis and experience shows that, due to stable earnings and a supportive regulatory environment, GB’s energy networks are a low-risk and attractive sector for investors.

Strong evidence from water regulation and Ofgem’s offshore transmission regime shows that investors will accept lower returns and continue to invest robustly in the sector.

These proposals are part of Ofgem’s draft determinations for the RIIO-2 price control for transmission and gas distribution network companies.

A separate RIIO-2 price control for the Electricity System Operator (ESO) will boost the funding and activities of the ESO to prepare to operate a zero carbon electricity system.

Today’s announcement does not apply to the price control for the electricity distribution sector, which runs from 2023, and on which Ofgem is consulting separately later this summer.

In response to the announcement, RenewableUK’s Head of Policy and Regulation, Rebecca Williams, said: “These proposals won’t bring forward the investment that the Government says it wants to kickstart a green economic recovery.

“This means fewer jobs and slower progress towards net zero.

“So it’s a missed opportunity by Ofgem to encourage investment in grid infrastructure and so it means consumers would lose out as vital grid upgrades wouldn’t happen.

“However, we welcome Ofgem’s recognition of the importance of working with network companies to achieve net zero.

“Its proposals to build more flexibility into price controls by using a net zero ‘re-opener’ mechanism to accommodate new technologies such as renewable hydrogen, as well as boosting innovation funding more widely, could unlock benefits for consumers.”