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    British Regulator Urges Network Spend for Net Zero


Ofgem has however also nearly halved the rate of return that network operators may earn on their investments, in its opening shot.

by: William Powell

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British Regulator Urges Network Spend for Net Zero

British energy regulator Ofgem proposed July 9 a £25 ($31)bn spend over the next five years to prepare the gas and power networks for emissions-free green energy. Investment in the networks that transport energy round GB is likely to rise, to ensure they can meet government targets for net zero emissions. This investment will also help generate green growth and employment, it said.

Ofgem said it would keep costs as low as possible for consumers by almost halving the rate of return on capital for network companies, saving thereby £3.3bn over the period from gas and power transmission alone. It said its "stable and predictable regulatory regime will continue to attract the investment Britain needs to go further and faster on decarbonisation.” But the network operators were not impressed (see below). The final decision will not be published until December.

Ofgem has also asked network companies for additional ideas for 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.

On innovation, a new Strategic Innovation Fund, together with funding to individual companies for network innovations, will provide £630mn 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 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.

'Too much stick, not enough carrot': Networks 

The Energy Networks Association said that the proposals did not go far enough to encourage the investment needed to achieve net zero emissions and support the UK’s economic recovery. "While network companies have historically been able to raise billions of pounds to invest in the networks and support the transition to a sustainable future at low cost to the customer, the proposals set out by Ofgem could significantly inhibit their ability to do so," it said.

“Network companies listened to their customers and stakeholders and put forward plans informed and influenced by their extensive engagement through focus groups and events held around the country. The plans put forward by network companies would make this possible with little to no impact on the average energy bill.

“We need to attract significant investment in a competitive global market in order to reduce the UK’s carbon emissions, tackle the climate emergency and do so at least cost to customers."