U.K. Grids Get $40 Billion Budget to Meet Net-Zero Targets

U.K. energy grids will have 30 billion pounds ($40 billion) to spend on ensuring the nation’s pipes and wires are able to cope with meeting the nation’s net zero emissions target by 2050.

The budget is for service, maintenance, upgrades and repairs on gas and power grids for the next five years, and is 20% higher than the spending limit initially proposed by energy regulator Ofgem. A further 10 billion pounds is being considered for future green projects including reinforcing the grid to connect offshore wind farms.

For more on the Ofgem numbers click here

Prime Minister Boris Johnson has set bold climate targets that will transform the energy industry. The networks have to find a way to accommodate electric vehicles, heat pumps and batteries for a low-carbon economy and to attract the necessary investment. Ofgem’s job is to make sure that the transition doesn’t push up consumer bills.

“This is a massive investment and we will all pay for this through our bills and so we are telling companies they must play their part,” Jonathan Brearley, chief executive officer of Ofgem, said in a call with journalists. “That does mean bringing down returns to shareholders, but also cutting waste, becoming more efficient.”

U.K. Grids Get $40 Billion Budget to Meet Net-Zero Targets

As well as the infrastructure funding, Ofgem also set the five-year price control that limits the returns utilities can make. The rate of equity return will be 4.55%, up from 4.2% originally proposed but still some way off the 6.5% companies said they needed to attract investors.

Grid operators have long argued that investors need a reasonable return to make the clean-energy transition possible. But it’s a balancing act for Ofgem, which has to avoid saddling consumers with the cost of funding projects that may prove to be outdated as technology advances.

When it comes to spending, SSE Plc will get an allowance of 2.2 billion pounds, 10% less than requested in their business plan. National Grid’s electricity transmission business will get 5.4 billion pounds, and its gas network 2.1 billion pounds, both about a quarter less than they asked for. These limits have all increased since the draft decision in July, according to Sanford C. Bernstein & Co. LLC.

SSE rose 2.6% to 1,398 pence a share, while National Grid gained 1.5% to 873.2 pence in London. The Stoxx 600 Utilities Index was up 0.3%.

“Overall there should be some relief,” analysts including Dominic Nash at Barclays Bank Plc said in a note. “We believe certainty is worth a few percent on the share price.”

National Grid said it’s reviewing Ofgem’s decision and will decide whether to accept the license or to appeal to the Competition and Markets Authority by late February.

If an appeal is launched to the CMA, “Ofgem’s commitment is that we will continue to work in a collaborative way with these companies,” said Brearley. “All of us have a strategic and important interest in net zero, all of us want a secure system for our customers, and ultimately, we’ll work constructively, even if we disagree with part of this.”

What the companies say:
  • SSE said it was “very disappointed” that Ofgem hadn’t increased the rate of equity return in line with its expectations and said it will “continue to keep all options open to secure an ambitious, fair and balanced price control settlement that meets the needs of all stakeholders and appropriately balances risk and reward,” according to a statement.
  • “We remain concerned that Ofgem’s proposals on the headline rate of return will not attract the global investment our transmission business requires if we are to support the clear net zero ambitions of the U.K. and Scottish Governments,” said Keith Anderson, chief executive of Scottish Power, the U.K. unit of Iberdrola SA.

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