Energy companies have reacted with concern and disappointment to the latest price regime proposed by regulator Ofgem.

The regulator has proposed cuts to the power companies’ budgets that would see a £20 reduction in household bills every year.  

SSE PLC (LON:SSE) said 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’.

National Grid PLC (LON:NG.), the gas and power network owner, added that it was “extremely disappointed with this draft determination which risks undermining the process established by Ofgem”.

“This proposal leaves us concerned as to our ability to deliver resilient and reliable networks, and jeopardises the delivery of the energy transition and the green recovery,” National Grid said.

Ofgem has proposed a halving of the returns allowed for the power companies to fund a £25bn upgrade of the UK’s infrastructure. The regulator said £630mln of this will be earmarked for green energy projects.

Ofgem said its analysis and experience shows that, due to stable earnings and a supportive regulatory environment, the UK’s energy networks are a low-risk and attractive sector for investors. 

Its proposals will nearly halve network companies’ allowed rate of return, it added, 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,” the regulator said.

SSE shares fell 3.5% and National Grid 5% as investors decided Ofgem’s proposals were bad news.

A final determination will be made in December with the new regime to come into effect from April 2021.

UBS said an initial glance looks negative for the sector, although sensitivity to a change in headline allowed return is quite low.

“We believe expectations for the allowed return on equity were in the range of 4.0-4.8% and so this comes slightly below the low end.”

 

— adds share price, analyst comment —