Ofgem to cap electricity distribution firms’ returns
Energy regulator Ofgem has announced its latest plan to up efficiency from Britain’s electricity distribution companies, by placing limits on the returns on investment they can generate.
The move comes as firms face ongoing pressure from government and the public to keep bills in check
The regulator said it’s proposing to lower the assumed cost of equity to six per cent, meaning an assumed cost of capital of 3.8 per cent for five of the country’s six companies in 2015-16, with further falls projected in subsequent years.
The reason this is important is that the assumed cost of capital determines the return a company can make on its investment during a price control – Ofgem is currently setting the electricity distributions companies’ price controls for 2015-2023.
SSE, SP Energy Networks, Electricity North West, Northern Powergrid and UK Power Networks – the five regional monopolies – all had their business plans sent back by the regulator in November, after it considered they could “deliver more value for consumers”. They’ll resubmit plans in March.
Western Power Distribution was the only firm deemed suitable for fast-tracking, meaning it’ll need to make an equivalent reduction in it assumed cost of equity, and therefore its cost of capital, in order to stay in the fast-track process, said Ofgem.