UK Energy Watchdog Softens Slash to Network Companies' Returns

By Jaime Llinares Taboada

U.K. energy-markets regulator Ofgem said Tuesday that it is setting higher returns for power and gas network companies in 2021-2026, compared with draft proposals.

However, new allowed returns will still be below those seen in the previous five-year period, as the regulator seeks to reduce bills by squeezing shareholders' returns.

As part of its final determination for RIIO-2--the regulatory cycle running from April 2021 to March 2026--Ofgem has raised the weighted average cost of capital allowance to 2.81% from the 2.63% proposal, although the ratio will remain below the 4% RIIO-1 average. Cost of capital determines the profit that companies are allowed to retain on their regulated network investments.

"We are reducing the amount paid to shareholders so that they are closer to current market levels. This means that companies can attract the vital investment we need whilst making sure that consumer don't pay more than is necessary to achieve this," Ofgem's Chief Executive Jonathan Brearley said.

The new regulation will affect network infrastructure owners such as National Grid PLC, SSE PLC and ScottishPower's owner Iberdrola S.A., which had all asked Ofgem to raise allowed returns from the cuts proposed in July.

Companies had argued that the previously proposed allowances weren't enough to attract the investment required to enable a fast transition toward a net-zero carbon future, which is expected to entail significantly higher electricity consumption. The U.K. government has pledged to achieve net zero emissions by 2050.

The baseline total expenditure allowance has been set at 23.32 billion pounds ($31.2 billion). The total spending package is almost GBP30 billion, around 20% more than proposed in July.

Ofgem said the new legislation will save some GBP2.3 billion in costs passed on to consumers during RIIO-2, compared with RIIO-1, equivalent to an average bill reduction of GBP10 per year before inflation.

Write to Jaime Llinares Taboada at jaime.llinares@wsj.com; @JaimeLlinaresT

(END) Dow Jones Newswires

December 08, 2020 02:38 ET (07:38 GMT)

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