The energy regulator Ofgem has confirmed it will cut allowances to some of Britain’s electricity distribution network operators (DNOs) by around £200 million following a review of price controls between 2010 and 2015.
Ofgem said the reduction will result in lower network charges on energy bills during the current RIIO (Revenue=incentives+innovation+outputs) electricity distribution price control covering the period 2015 to 2023.
The regulator said electricity demand was “significantly lower than expected” in the 2010-2015 price control, adding some DNOs “did not need to spend as much as expected on reinforcing their grids”.
Ofgem said it has therefore reduced allowances around £74 million in total across some of the distribution networks of Western Power Distribution (WPD) Scottish Power, UK Power Networks (UKPN) and SSE.
The regulator said some DNOs had also cancelled a number of major investment projects, valued at £15 million or more, and spent less than expected on others where they found better ways to complete the work.
As a result, OfGem has reduced allowances by around £130 million in total across WPD’s East Midlands network and two of UKPN’s networks.
In July Ofgem warned investors in energy networks to prepare for lower returns from 2021 when it plans to implement tougher price controls.
The regulator sets the charges network operators like SSE, National Grid and gas network operator Cadent can charge over eight year periods because the operators have a monopoly control of supply.
Price controls were overhauled in 2010 with the introduction of the performance-based RIIO Revenue using Incentives to deliver Innovation and Outputs.
Ofgem said under RIIO-1 network companies have been allowed to recover revenues of around £96 billion over an eight-year period.
Current RIIO-1 price controls for gas and electricity transmission networks and gas distribution networks are due to end on 31 March 2021 and the price control for electricity distribution ends on 31 March 2023.
Ofgem said the tougher RIIO-2 price controls are in line with other utility regulators, with “clear evidence pointing towards the cost of investment required for networks (cost of capital) being significantly lower”.
It points to lower costs in renewable energy transmission and falling demand for both gas and electricity.
The regulator said National Grid’s recent sale of a 61 per cent stake in National Grid Gas Distribution realised a premium of more than 40 per cent above the regulatory asset value, “suggesting that investors were willing to accept very low yields”.
Commenting on the £200 million allowance cut, Jonathan Brearley, Ofgem’s senior partner for networks, said: “We have already told network companies that they should prepare for tougher price controls from 2021, with lower returns.
“We also want to get a better deal for customers in the current price control period which is why we have announced a reduction in the DNOs’ allowances today.
“This is in addition to savings of over £4.5 billion for customers.
“These result from other action we have taken to reduce revenues in the current price controls, or voluntary contributions from some companies.”