Energy networks are the masters of the long game, they have to be. Having an eye on the future is simply part of a network’s DNA.
So, while chief executives will not have been surprised by Ofgem’s decision this week to stick to its December plans to cut returns under RIIO2, they will have been exasperated at what some see as an overreaction.
Yes, the cost of equity figure may have shifted a little in their
favour, up 0.3 on the mooted 4 per cent. But it still falls way short of their view of a fair return, at between 5.5 and 6.3 per cent, and even further off the comparative 7 to 8 per cent allowed under the current price control regime.
As one network source I spoke to on Friday morning put it: “It’s
a little better. But it’s absolutely nowhere near enough, given everything we are expected to do.”
From EVs and flexibility on the electricity side, to delivering on
what a growing consensus appears to see as the way forward for gas, namely hydrogen, network bosses have in-trays stuffed full of massive challenges and work to do.
Meanwhile the mood of the nation is building behind urgent
action on climate change – with networks at the front and centre of the country’s efforts to meet its carbon targets.
But the danger is that such low returns will lead to serious risk aversion, to a tracking back on innovation and the key UK successes of the past decade, such as the achievements in local electricity generation and renewables.
Instead, they could lead to a “no frills” dumbing down of the networks – at the precise moment they need to deliver real change.
It’s an unenviable job for the regulator. And while Ofgem’s vision represents good progress on retaining some incentives, such as the totex sharing mechanism, networks will continue to make their case as they draft business plans to submit to challenge groups over the coming months.
The news this price control could lead to £6 billion of savings for network customers over five years will have gone down well with those consumer groups who berated “eye-watering returns”.
Yet failing to build sufficient risk into the cost of equity still feels like a short-term response at the expense of future customer benefits, such as fast-charging EVs, smart grids and decarbonisation.
Because consumer interests stretch into the long term too.
Suzanne Heneghan, is editor, of Utility Week magazine, contact her at suzanneheneghan@fav-house.com