National Grid's (NG.) returns face being slashed after energy regulator Ofgem announced tougher-than-expected limits on the amount of revenue energy networks can recover from users. The proposals that would limit allowed return on equity to 3-4 per cent, a move analysts at RBC Capital Markets said would raise questions about the sustainability of National Grid’s dividend.
The regulator revealed the proposals as part of its consultation for RIIO2, price control regulation that comes into effect from 2021. In the draft document, published in March, Ofgem had proposed a 3-5 per cent range in retail price index terms. The latest proposals would cap returns at 3 per cent in RPI terms, so the announcement came as a nasty surprise. The regulator itself noted the cap would lower baseline returns by around 50 per cent lower than current levels, which are set at between 7 and 8 per cent at present.
National Grid responded to queries over the health of its dividend by saying its policy remained “unchanged”, adding that the regulator's consultation was still in its early stages. However, it added that the proposed cap on returns did not reflect the risk borne by transmission networks. Shares in the FTSE 100 group fell 7 per cent on the day the proposals were released, while those in SSE (SSE) were down 2 per cent.
“In order to deliver the major capital programme required across our networks in a rapidly changing energy market, we need to ensure the regulatory framework also provides for fair returns to shareholders,” management said in a statement.
National Grid will be hit the hardest in the sector, with the proposals affecting networks equivalent to roughly 40 per cent of its operating profits, according to brokerage RBC Capital, and 25 per cent for SSE.
