U.K. Green Economy Push Faces Price Pressure From Networks

Britain’s energy regulator is under pressure to ensure it helps network operators like National Grid Plc finance the transition to a low carbon economy without passing the costs on to consumers.

Investment in the green transition is key to the country hitting its climate targets but it won’t come cheap. Ofgem will unveil on Thursday its draft price control model that aims to balance what grid companies can earn on their investment while keeping prices as low as possible for customers.

Network companies have called on Ofgem for more headroom in order to accommodate the electric vehicles, heat pumps and batteries needed for the government’s goal to zero out emissions. Britain’s post-pandemic green recovery plan has also given grid operators the opportunity to argue that investors need a reasonable return to make the clean-energy transition possible.

“As we look at the green recovery and we look at the potential for what good it can do for this country, we have to bear in mind affordability,” said Alistair Phillips-Davies, chief executive officer of SSE Plc.

“If we want innovative investment we need to be in a place where we’ve demonstrated that industry and government and regulators are working together to give confidence to capital markets so they could put money into these kind of projects,” he said.

Companies such as SSE and Iberdrola SA have made clear that the 4.3% cost of equity return proposed by Ofgem is too low. SSE and National Grid see 6.5% as a fair level and will be waiting to see what emerges Thursday.

Britain set its 2050 net-zero emissions target in 2019, the year after Ofgem made its initial price control proposals. The regulator said the energy transition is important to its decisions but has highlighted the danger of over-investing in projects that quickly become redundant as technology advances or government policy changes.

Iberdrola SA’s Scottish Power unit wants to spend as much as 2.8 billion pounds ($3.5 billion) in the next five years under the right regulatory conditions.

“If you hold back on this, you aren’t going for net zero as quickly as you could,” said Keith Anderson, chief executive officer at Scottish Power.

The spending would fit well with the government’s rhetoric about getting the country back to work, Anderson said. Projects to expand transmission infrastructure would put people to work quickly.

Investment to meet net zero could potentially create 400,000 jobs in the U.K. and 100,000 in the next decade, National Grid chief executive John Pettigrew said in an interview.

The energy networks are investing around 64 billion pounds in eight years to 2023, according to the Energy Networks Association.

  • The second grid price control period, or Revenue using Incentives to deliver Innovation and Outputs (RIIO), starts in 2021 and lasts for five years
  • It applies to electricity and gas transmission networks and gas distribution grids; the price control for the electricity transmission grid runs until 2023 and will be updated separately
  • When Ofgem outlined proposals for this price control in 2018 it proposed “much lower” returns levels that would save consumers 6.5 billion pounds
  • The perception that grid companies were earning excessive profits led the opposition Labour party to propose nationalizing the sector. Leader Keir Starmer has pledged to support “common ownership” of energy

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