Britain is generating increasing amounts of renewable energy and millions of electric vehicles will be on the roads in coming decades. Homes and businesses in the future will get their power and heat from cleaner energy sources.
Consumers pay for the cost of maintaining and upgrading the networks to enable these changes through their energy bills under Ofgem’s regulatory framework.
Ofgem has proposed a much lower cost of capital for network companies to raise the billions of pounds of investment needed in the next price control period from 2021. This will result in lower returns for investors and more savings for consumers.
Based on current market conditions and the evidence available, Ofgem’s proposals would set the baseline (cost of equity) returns at 4% (under CPIH) – about 50% lower than the previous price controls. Ofgem also proposes to keep adjusting the cost network companies face to borrow (cost of debt) annually so that consumers continue to benefit from the fall in interest rates since the financial crisis. The lower overall cost of capital is expected to save consumers £6.5 billion in the next price controls from 2021 onwards.
Today’s announcement follows Ofgem’s proposals last month to introduce fixed charges to recover some electricity network charges. This would ensure that those who generate their own electricity at home or on-site pay a fair share of the charges for the grid and reduce the burden on other consumers.*
In total, these reforms could save consumers £45 per year from 2021.
Alongside the network price controls, Ofgem will press ahead with further network charging reforms to squeeze more capacity out of the electricity grids to cut the cost to consumers of moving to a smarter, more flexible energy system.
This includes incentives for drivers to charge electric vehicles outside peak times, to allow more electric vehicles to be charged from the existing grid. More flexible grid access arrangements could be offered to suit renewable generators. This will help to cut costs by reducing the need for expensive new power lines and stations and free up existing grid capacity for generators and other users.
Jonathan Brearley, executive director for systems and networks, said: “Our proposals for the new network price controls and charging reforms will help build a lower cost, fairer energy system which is fit for this smarter, cleaner future.
“We want to cut the cost to consumers for accommodating electric vehicles, renewables and electricity storage, and make sure that all consumers benefit from these technologies.
“This will mean driving a harder bargain with network companies to ensure that households who need it always have access to safe and secure energy at a fair price.”
- Ofgem’s proposals for re-wiring the energy system will enable all consumers to benefit from new technology like electric vehicles and renewables at the lowest cost;
- Ofgem proposes further cuts to the cost of capital for networks which, together with other reforms, could save consumers £45 per year;
- Ofgem also proposes measures to ensure all consumers pay a fair share for network services.
* The costs of the pylons and cables that make up the grid are recovered through electricity network charges which amount to around £9 billion per year. Under the current network charging system, residual charges are based on how much electricity consumers take from the grid. Users who generate electricity themselves on site can avoid a lot of these charges even though they use the grid as back-up. As a result, consumers that take all their electricity from the grid, including households which have not installed solar panels or other renewables, pay more of these charges.
Ofgem’s proposed charging reforms will ensure these charges for the grid are shared fairly between all consumers. They would be broadly similar to fixed telephone line rental arrangements. Under these proposals, many homes and businesses will save money, although some, including those that generate electricity at home or on-site, could pay more. Ofgem is asking for views on whether the changes should be implemented in 2021, or phased in between 2021 and 2023.
Overall the reforms to residual charges and embedded benefits set out today could lead to total savings to consumers of between £5 billion and £7.6 billion from when they are implemented, up to 2040.