Ofgem’s tougher price controls to limit network owner revenue


Price controls set the revenue framework defining expected returns for network owners from consumer charges. Ofgem has confirmed that the default length of the next controls from 2021 will be five years (compared with the current eight years).

There is no update to the 3%-5% cost of equity range (the amount the companies can pay their shareholders) at present. This is the lowest rate ever proposed for energy network price controls in Great Britain. Ofgem estimates this would result in savings of over £5 billion for household consumers (or about £15 – £25 per year on the dual fuel household bill).

Ofgem will extend the scope for opening up high value network upgrades to the benefits of competition across the gas and electricity sectors in the next price control assessment.

To signal its intent Ofgem has confirmed that National Grid can build the grid interconnector to link the new Hinkley Point C nuclear power station. However, Ofgem will set the revenue National Grid can earn from the upgrade, based in part on its experience in cutting the costs of connecting offshore wind farms to the grid by tendering the ownership of these links.

Jonathan Brearley, Ofgem’s executive director for systems and networks, said: “Today we have set out our plans which will bring in tougher price controls with lower expected returns for network companies. This is part of our ongoing programme to ensure that consumers get reliable and secure power supplies at a fair price.

“As part of this continuous drive to deliver value for consumers we are using a new benchmarking approach to cut the costs of connecting the new Hinkley Point C nuclear power station. This is another example of how we are evolving regulation to deliver the upgrades to our power network while ensuring the impact on bills is kept as low as possible.”

Ofgem’s decision on the framework for setting the next price controls also confirms that new independent user groups and customer engagement groups will be set up by each of the companies to give consumers a stronger voice in how the price controls are set. For the first time open hearings will take place in the spring of 2020 where companies’ spending plans will be scrutinised.

Ofgem is also retaining a funding package in the next price controls for innovation. Technologists, scientists, inventors and innovators will be able to use this funding to solve some of the biggest research and development challenges in adapting the energy networks to a smarter, more flexible energy system.

These include increased use of electric vehicles, more local production of energy and integrating digital technology.