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.
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.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.
Please see important Research Disclaimer.
See an opportunity to trade?
Go long or short on more than 16,000 markets with IG.
Trade CFDs on our award-winning platform, with low spreads on indices, shares, commodities and more.
Live prices on most popular markets
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.