Ofgem cost-cutting energy plans save consumers, but hurt investor returns

The UK energy regulator has proposed new price controls that will save consumers around £45 a year but will come at the expense of investor returns on electricity and gas networks companies.

Ofgem Source: Bloomberg

The Office of Gas and Electricity Markets (Ofgem) has proposed new price control proposals network companies in a move that will see consumers save around £45 a year but will result in lower returns for investors.

Based on market conditions, the regulator plans to set baseline (cost of equity) returns at 4% until 2021 - around 50% lower than current price controls, which stand at 7.8%.

Ofgem also proposes to keep adjusting the cost network companies face to borrow 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.

'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,' Ofgem Executive Director for Systems and Networks Jonathan Brearley said.

'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,' he added.

Energy networks see shares tumble

The announcement by the regulator precipitated shares in National Grid to slide by nearly 9% on Tuesday, with the stock hovering at around £7.60 as of 3:50pm GMT.

Commenting on the latest price control proposals by Ofgem, CEO of the Energy Networks Association David Smith said: 'It’s important that the public and the country as a whole benefit from the changes that are sweeping across the country’s energy system, but much more work still needs to be done by the regulator to understand the pace of that change, the risks that investors face and how that is reflected in the price control.'

'But as things stand, the proposals could jeopardise the innovation and investment that is critical to delivering these important outcomes. Britain’s people and businesses risk missing out,' he added.

Shares in SSE and Iberdrola both saw their respective share prices fall by 1% on Tuesday following the Ofgem’s tough stance on price controls.

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