Watchdog sets out new funding settlement, but proposals face immediate backlash from "disappointed and deeply concerned" network operators who fear plans could hamper smart grid deployment
Ofgem has today unveiled proposals that would see the UK invest £25bn over the next five years to deliver a "greener, fairer energy system" while cutting consumer energy bills. But the plans were immediately panned by network operators, who have warned the new spending regime will struggle to attract the level of investment needed to deliver the UK's net zero target.
In plans published today, Ofgem explained the upfront expenditure, generated in part from slashing network companies' returns and linking spending plans to ambitious climate targets, would support the growth of green energy in the UK while enabling ongoing maintenance and operation of gas and electricity networks.
It added that companies could access a further £10bn generated through price controls for measures that can help deliver a net zero emission grid and confirmed plans for a £630m funding pot that is set aside to support green innovation.
However, it stressed that "Ofgem will scrutinise every investment and only give the green light to measures that deliver decarbonisation at the lowest cost to consumers".
The network operator said the investments would save customers £20 on household electricity bills a year, although this would be offset by an increase in investment and charges expected to come later in the price control process.
In order to deliver this 'unprecedented' value for money for consumers, Ofgem has proposed to halve the return energy companies are allowed to make from their investments, Ofgem said, a move it estimated would save "£3.3bn over the next five years for gas and transmission sectors alone".
The plans also propose cutting £8bn from companies' spending plans by setting tougher efficiency targets and barring costs that they have "simply not justified" as delivering value for money for customers
"Now more than ever, we need to make sure that every pound on consumers' bills goes further," said Jonathan Brearley, Ofgem's chief executive. "Less of your money will go towards company shareholders, and more into improving the network to power the economy and to fight climate change."
But network operators were quick to criticise the plans, which they said would struggle to attract the level of investment needed to transition to a net zero economy. Industry figures suggested they would fight for major changes to the proposals during the consultation period, which now lasts until 4 September.
Natoinal Grid said 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," it added
Scottish and Southern Electricity Networks Transition, a subsidiary of SSE, similarly said it was "disappointed and deeply concerned" by the plans. The approach "fundamentally fails to deliver on net zero, inadequately reflects stakeholder and customer needs, and falls short in seeking to attract the significant investment required," it added.
David Smith, chief executive of trade body the Energy Networks Association (ENA), said it was "concerned" by the proposals. "While network companies have historically been able to raise billions of pounds to invest in the networks and support the transition to a sustainable future at low cost to the customer, the proposals set out by Ofgem could significantly inhibit their ability to do so," he warned.
However, Ofgem countered that it was confident that its "stable and predictable regulatory regime" would ensure that the sector could continue to attract investment. "Strong evidence from water regulation and Ofgem's offshore transmission regime shows that investors will accept lower returns and continue to invest robustly in the sector," it said.
Meanwhile, some green groups hailed Ofgem's focus on the UK's net zero transition, which they said would get the UK "back on track" to meet climate goals.
Dr Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit (ECIU), said: "Shifting focus to cutting carbon at the same time as keeping a lid on network profits is good news for hard-pushed families and for efforts to get the UK back on track to meet its climate targets. Ofgem appears to have listened to criticism that it hasn't been pushing hard enough on environmental measures and has been giving the networks - which make up around a quarter of domestic bills - an easy ride."
He added that "linking returns to carbon emissions will give [network operators] nowhere to hide, and should ensure that UK resources, such as a world-leading position in offshore wind, are bolstered by smart technologies needed to balance the grid at low cost".
Under the plans Ofgem also unveiled proposals for a new £630m 'strategic innovation fund' that would support clean energy technology research and development, singling out the decarbonisation of heat infrastructure with hydrogen as a potential area for support.
The latest developments came in the same week as a number of innovative low carbon smart grid and energy storage projects continued to advance.
Statkraft and GE Power Conversion announced they had teamed up to manufacture and install two giant flywheels at a site in Keith, Moray to provide balancing services to the grid, while EDF announced it has been awarded a contract by Western Power Distribution (WPD) to supply local grid flexibility services in the Bridgwater area using a cohort of domestic Powervault batteries.
The UK's most prominent source of climate change denial' is soliciting donations, but, argues Andrew Warren, its influence is waning
Select committee delivers damning assessment of government's "lack of leadership" when it comes to managing England's water supply, warning that public awareness campaigns and better oversight over companies water leakage performance is needed
NHS Sustainability Day campaign launches annual impact report as work continues by expert panel commissioned by NHS England to investigate into how and when the health service can meet net zero
The tech giants efforts to curb emissions from its globe-spanning logistics operations are continuing to expand