Ofgem has revealed that it intends to almost halve the allowed returns energy companies will be able to make in the next regulatory period, running from 2021 to 2026. The regulator is proposing that the allowed return on equity – based on the ‘consumer price index including owner occupiers’ housing costs’ (CPIH) – be set at 3.7 per cent for electricity transmission and 3.95 per cent for gas transmission and distribution, down from the current 7-8 per cent level. The new plans are also a step down from the 4.3 per cent threshold it had proposed last year.
Justifying its decision to cut the rate of return to a historic low, Ofgem said it was so that “less of consumers’ money goes towards network companies’ profits, and more towards driving network improvements". It estimates that the reduction in energy companies’ earnings will save £3.3bn over the next five years, translating into a £20 annual saving for the average household bills. Despite the lower returns on offer, the regulator believes investors will still be willing to fund system upgrades given that the UK’s energy networks are a “low-risk and attractive sector”. Dame Gillian Guy, chief executive of Citizens Advice, believes Ofgem has “struck the right balance between shareholder returns and value for money for energy customers”.
Shareholders might be inclined to disagree. Ofgem is proposing that the cost of equity – the rate of return energy companies pay their shareholders – be reduced to between 3.9 per cent and 4.2 per cent, down from 7-8 per cent in the current regulatory period.