Energy companies will be permitted to invest more on green projects in the next five years and gain higher returns from investments as Ofgem relaxes its proposals.
Office of Gas and Electricity Markets (Ofgem), the industry regulator, will allow energy companies to increase investment of at least £40 billion into green energy and gain higher returns on investments, after the companies have threatened an unprecedented rebellion against Ofgem’s plans to save £20 a year on their bills. The plan will halve the savings payers of energy bills can expect over the next five years to £10 a year after softening the crackdown on company profits proposed over the summer. Ofgem has recently given permission for investments in electricity grid upgrades, which are paid through energy bills, to increase by a fifth compared to its earlier proposals, which sought to limit spending to £25 billion.
In addition, Ofgem will allow companies to make returns of 4.3% on their energy investments, higher than its earlier plan to cut the returns to a record low of 3.9%. The new limit is still well below the returns of 7% to 8% allowed over recent years.
The proposals sparked intense opposition among energy network companies, which called on Ofgem to rethink and reassess its proposals or risk an investigation by the Competition and Markets Authority. Jonathan Brearley, Ofgem chief executive, said that the plans would allow companies to attract investment into Britain’s green revolution, but would also include a new limit on the amount payable to shareholders and provide £132 million to help protect vulnerable customers.
“Our £40 billion package massively boosts clean energy investment,” he said. “This will ensure that our network companies can deliver on the climate change ambitions laid out by the prime minister last week, while maintaining world-leading levels of reliability”.
The plan was admired by Citizens Advice as “genuine progress” in balancing the relationship between the need to invest in tackling climate crisis and protect consumers. The acting chief executive of Citizen Advice, Alistair Cromwell, said “for too long network companies were able to make excessive profits, not because they were efficient firms, but simply because previous price controls were too generous.” He continued, “Although we are pleased with this progress, we have argued that Ofgem could have gone further in limiting shareholder returns and still believe that to be the case.”
Network companies, such as National Grid, SSE and Scottish Power, said they would review the plans before responding in full. SSE and Scottish Power remain disappointed with the rate of return offered on their investments, and previously said they might request the Competition and Markets Authority for a ruling on Ofgem’s final decision. In September, after Ofwat, the UK’s water regulator, proposed a plan that would slash household bills by approximately £50, the competition watchdog ruled against the proposal, stating that the report was too strict in limiting investments water companies are allowed to make.