Leading energy companies have warned that they could ration their investment in power network upgrades after the regulator said that their returns would need to halve.
Under Ofgem’s plans, groups such as National Grid, SSE and Scottish Power would have to invest £25 billion over the next five years to improve electricity and gas networks and thus help Britain to hit its carbon reduction targets.
Households would save about £20 each year on gas and electricity bills under proposals that Ofgem’s chief executive claimed would lay the foundation for “a greener, fairer energy system for consumers”.
“Less of your money will go towards company shareholders,” Jonathan Brearley, 46, who took over in February, told the companies.
However, the industry claims that his plans will stifle a green economic recovery. National Grid said that the proposals were “extremely disappointing” and would jeopardise the shift away from carbon.
Keith Anderson, chief executive of Scottish Power, said that Mr Brearley had “flunked his first test. He’s not just missed the target, he’s missed the wall the target is pinned on.”
Ofgem was founded 20 years ago to protect the interests of consumers. Its role includes regulating the companies that operate gas pipelines and the electricity network, determining how much they can charge households.
Britain has pledged to cut its greenhouse gas emissions to net zero by 2050, which is expected to require a huge expansion of green power generation and infrastructure. Transmission companies face a chicken-and-egg problem over investing more in infrastructure, such as motorway charging networks for electric vehicles, while demand for such services remains low.
Under a five-year plan published yesterday, Ofgem said that it would cut the returns that energy networks can earn to 3.95 per cent, which it estimates would save households about £3.3 billion over five years. The rules will change next year and are set to remain in place until 2026.
Although Ofgem believes that network companies will be willing to invest, as transmission systems are low- risk, David Smith, chief executive of the Energy Networks Association, an industry lobby group, said that “while network companies have historically been able to raise billions of pounds to invest in the networks . . . the proposals set out by Ofgem could significantly inhibit their ability to do so”.
Mr Anderson said that the rate of return proposed by Ofgem was lower than in almost every other country in Europe and that he would struggle to persuade Iberdrola, Scottish Power’s Spanish owner, to commit more cash to Britain. The proposals need to be ratified by Ofgem’s board later in the year and Mr Anderson warned that he would launch a legal challenge if the regulator did not improve the returns prescribed.
Shares in National Grid fell by 49½p, or 5.5 per cent, to 850p last night, while those of SSE dropped by 54p, or 4 per cent, to £12.87.