Perth-based renewable energy and electricity networks giant SSE and Iberdrola’s Scottish Power both slammed a proposal on Thursday by the UK’s energy regulator Ofgem to cut in half the returns energy companies can make to cover the costs of maintaining electricity and gas networks.
Ofgem said energy network operators should invest £25 billion from 2021 to 2026 to help deliver emissions-free energy and proposed cutting the returns energy network firms can make in order to reduce household bills.
Ofgem said that from April next year it plans to set “baseline” returns the companies are allowed to make at a record low of 3.95% — which compares with returns of 7% to 8% under current rules.
The UK’s energy infrastructure is owned by several firms including SSE, Iberdrola’s Scottish Power and National Grid.
SSE shares fell 3% after the news.
“Given the scale of green investment likely to be needed in future, Ofgem is keeping costs as low as possible for consumers by proposing the lowest ever rate of return on capital for network companies …” said Ofgem in a statement.
“Ofgem’s proposals nearly halve network companies’ allowed rate of return, so that less of consumers’ money goes towards network companies’ profits, and more towards driving network improvements.
“This would save £3.3bn over the next five years for gas and transmission sectors alone.
“In addition Ofgem is proposing to cut over £8bn from companies’ spending plans by setting them stretching efficiency targets and disallowing costs that companies have simply not justified as delivering value for money for consumers.
“It is now up to the companies to come back and provide more robust evidence on why this expenditure is needed.”
In a stock exchange statement, SSE responded: “Scottish and Southern Electricity Networks Transmission (SSEN Transmission), the wholly-owned subsidiary of SSE plc, is disappointed and deeply concerned by today’s publication of Ofgem’s Draft Determination for the RIIO-T2 price control period.
“Unfortunately, based on an initial assessment, SSEN Transmission believes the approach set out in Ofgem’s Draft Determination fundamentally fails to deliver on net zero, inadequately reflects stakeholder and customer needs, and falls short in seeking to attract the significant investment required.
“The Draft Determination, subject to an eight week formal consultation and ongoing dialogue, sets out Ofgem’s initial view of SSEN Transmission’s RIIO-T2 Business Plan, ‘A Network for Net Zero’.
“SSEN Transmission’s Business Plan, co-created with stakeholders, is underpinned by a robust evidence base that demonstrates that the investments proposed, and associated outputs, are needed now to build a network for net zero whilst efficiently maintaining network reliability and security of supply.
“SSEN Transmission will now consider the Draft Determination in detail over the coming weeks and will continue to seek to work constructively with the Government and Ofgem to address these issues during the consultation period.
“However, if significant changes are not made in Ofgem’s Final Determination in December, SSEN Transmission will be forced to keep all options open to secure an ambitious, fair and balanced price control settlement that meets the needs of all stakeholders.”
Rob McDonald, SSE Managing Director of Transmission, said: “Whilst our stakeholder-endorsed and evidence-based business plan was in step with the Government’s low carbon investment ambition, Ofgem’s first pass at a settlement resembles a worrying return to austerity.
“Ofgem’s Draft Determination is a barrier towards achieving net zero and damaging to the green economic recovery.
“At present the draft settlement does not strike the right balance for all stakeholders and without significant changes during the consultation period, there is a real risk that the critical investment in Britain’s electricity networks will be unnecessarily slowed down by an appeal process via the CMA, which is not in any stakeholders’ interests”.
ScottishPower CEO Keith Anderson said: “Today’s announcement is gravely at odds with the UK Government’s ambition to boost investment in green infrastructure to help drive the economic recovery and accelerate Net Zero.
“It’s a massive missed opportunity.
“Coming just one day after Rishi Sunak has taken welcome steps to kickstart the Green Recovery, Ofgem is now trying to slam on the brakes. It makes no sense whatsoever.
“This was Jonathan Brearley’s first big test as the new Ofgem Chief Executive and he’s flunked it.
“Instead of investing more in creating green jobs and skilled apprenticeships in every community, at a time when the UK needs them most, this is a short-sighted return to austerity politics.
“Nobody benefits from this half-baked plan.
“It’s bad for jobs, bad for apprenticeships, bad for training and bad for the UK supply chain.
“Net Zero can be an accelerator of the economic recovery, but only if private companies are given the right conditions for investment.
“Slamming the door in investors’ faces by offering one of the lowest rates of return of any developed country traps the UK in an economic cul-de-sac.
“These proposals to drive companies to the lowest cost denominator leave us with big questions about how Ofgem can match its framework against the clear drive and leadership that we are seeing from government, at both UK and Scottish levels, where there is rightly a focus on how best to attract investment in a powerful economic stimulus that delivers long-term benefits.
“According to the Committee on Climate Change, the UK needs to double clean energy generation in order to hit its Net Zero targets and Scotland will provide half of that green power.
“Our transmission system already supports 11,000MW and is the vital link that brings green energy into people’s homes which is why investment in our networks now will benefit us for decades to come.
“The danger here is that Ofgem’s view puts the UK at an unnecessary disadvantage.
“In the wake of the COVID-19 crisis, there is fierce international competition to secure capital for infrastructure projects to support Net Zero and many nations are now powering ahead with green investments in their energy networks.
“Our plans come at a low cost to the consumer and deliver huge benefits.
“Our customers agree, with 80% of those surveyed supporting our business plan as good value for money.
“At this critical juncture, we should be doing much, much more to unlock the economic and environmental benefits of investment in Net Zero networks.
“Our proposals would help do that, at an additional annual cost per customer of less than 50 pence.
“We’ll continue to press our case very hard for Ofgem to rethink its approach in the context of the green recovery.”