Ofgem sticks by its estimates that the first competitive round of licensing, with nine links awarded to operators, has reduced costs by around £350 million. However the NAO said Ofgem’s estimate was sensitive to small changes in its assumptions.
Inflation protected income may have encouraged pension funds to invest in the assests, said the NAO, “but appears generous to licensees whose financing costs do not rise with inflation… The authority did not analyse in detail the trade off betweeen investors interests and the cost of inflation risk that would be borne by consumers.”
The NAO urged Ofgem to produce a fully quantified estimate of costs and savings from the first tender round to test its assumptions.
In future Ofgem should speed up the tender process to reduce transaction costs; introduce a mechanism to capture a share of refinancing gains and provide incentives for operators and designers to minimise power losses on cables. The NAO also recommended that if licensees sell any share of their assets, the value must be disclosed so that inefficiency in the pricing of equity in licence bids would be exposed.
Finally, it recommended that Ofgem used the offshore transmission regime to shape onshore transmission and distribution price setting.
In a statement Ofgem responded: “We are already considering possible changes to future tenders through consultations with stakeholders to address many of the NAO’s recommendations.”