Ofgem net zero
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UK network operator Ofgem has unveiled proposals for a five-year investment programme of approximately £25 billion ($31.6 trillion), designed to transform Britain’s energy networks to deliver emissions-free green energy and help generate “green” energy employment.

According to Ofgem, investment in the UK’s networks that transport energy is likely to rise, to ensure they can deliver clean energy and meet UK government decarbonisation targets.

Given the scale of green investment likely to be needed in future, Ofgem says it 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.

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Jonathan Brearley, Ofgem’s chief executive, said: “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.” 

Green recovery

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.

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 £10 billion 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 £630 million 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.

‘Unprecedented’ value for consumers

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 £3.3 billion ($4.1 billion) over the next five years for gas and transmission sectors alone. 

In addition, Ofgem is proposing to cut over £8 billion ($10 billion) 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.

The 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 in 2020.

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