Tougher set of price controls move a step closer
Press release
- Publication date
- Industry sector
- Distribution Network
- Offshore Transmission Network
- Transmission Network
- Ofgem confirms decisions which will help to lower returns for network companies
- Network companies spending plans to be subjected to open hearings
- Using the benefits of competition to deliver the power link to Hinkley C nuclear power station to drive value for consumers
Ofgem’s plans to deliver savings of over £5bn to consumers through tougher price controls for energy networks moved a step closer today.
The price controls set the revenue monopoly network owners can earn from charges to consumers. 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 controls. To signal its intent Ofgem has confirmed that National Grid can build the grid upgrade to connect 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.
Notes to editors
- See Ofgem’s decision on the framework it will use to set the energy network price controls: RIIO-2 framework decision
See the decision document on how the link to the Hinkley Point Cpower station will be delievred: Hinkley - Seabank: Decision on delivery model
For background information on Ofgem’s framework for setting the next price controls see the press release from March 7. - This December Ofgem will consult on the detailed methodology it will use for setting each of the three price controls it is assessing in this review (for gas distribution, gas transmission and electricity transmission). Following this the companies will submit business plans by autumn 2019. Ofgem’s final view on price control allowances will be published by the end of 2020. The methodology for the electricity distribution price control will be set at a later date as the current price control for these companies runs until 2023.
- National Grid will build and operate the grid upgrade to connect the new Hinkley Point power station and Ofgem will set the company’s revenue for doing so using a ‘competition proxy’ approach. This will save consumers money as Ofgem’s assessment of the revenue allowed will be based in part on the regulator’s experience in tendering the contracts to own new transmission links to offshore wind farms. Successive tender rounds have cut the cost to consumers of connecting offshore wind by at least £700 million since 2009. More information on the offshore transmission regime.
Further information
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