Ofgem vows to ‘squeeze investor returns’ and reduce consumer electricity bills 

The new framework puts the environment at its centre with the aim of pushing electricity distribution companies to take further steps to decarbonise energy generation. A move it says will lead to energy suppliers making lower company returns from 2023 and one that will push them to invest more in a carbon-neutral system.

As part of the new plans, Ofgem pledged to slash consumer bills over the next decade while taking a chunk out of distributors' profits.

Distributors will be expected to cut carbon emissions, ensure safety, avoid blackouts and support vulnerable customers - all at a reasonable price to consumers. The price controls will also change how usage is charged for so that local grids can provide for future sources of demand such as electric vehicles.

Pressure from the CBI

Ofgem has come under pressure in recent months from the Confederation of British Industry (CBI) to prove that it can support the UK reaching its 2050 climate targets.

The business group has previously said that Ofgem is failing to prioritise the climate emergency and that it should be given more statutory duties by the government. The criticisms have also been made by energy companies, climate change campaigners and the Committee on Climate Change.

According to Ofgem, the new framework will enable distributors to meet predicted rises in demand on energy grids from charging electric vehicles.

“As we decarbonise our society and economy, we will increasingly rely on renewables to generate the electricity to power the country, our vehicles and potentially heat our homes too. Electricity distribution networks will be crucial to making this transition to a smarter, net-zero emissions economy. Ofgem’s stable and predictable regulatory regime will allow companies to attract the investment they need to go further in decarbonising the system whilst saving consumers money by keeping returns as low as possible,” said Cathryn Scott, acting executive director for systems and networks at Ofgem.

·Using the same methodology as the other RIIO-2 price controls starting in 2021 to calculate the return that can be paid to equity investors. This will reduce the returns by more closely aligning it to financial market conditions so that it better reflects the low risk borne by networks in a stable and predictable regulatory environment.

·Reducing forecasting error by indexing, rather than trying to forecast, key variables such as interest rates which better adapts to changes in financial market conditions and reduces uncertainty.

·Adopting an outputs and incentive framework that focuses on the things that really matter to consumers, including high levels of reliability.

·Imposing tough scrutiny of electricity distribution network company business plans through an extension of the Enhanced Engagement programme used for the transmission and gas distribution sectors, including the central RIIO-2 Challenge Group and company-level Customer Engagement Groups.

·Using competition rather than monopoly regulation to drive efficiency, where appropriate, including the use of new flexible technologies to compete with traditional investment, where the benefits are likely to exceed the costs.

·Retaining a strong innovation stimulus covering both large-scale strategic R&D projects as well as smaller-scale technological innovations, with a focus on decarbonisation and vulnerability.

·Confirming the introduction of automatic correction mechanism (called return adjustment mechanism) to protect consumers against the risk of extreme deviations in company returns.

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