Ofgem has unveiled a five-year plan to ramp-up local grid capacity across the country to meet people’s energy needs for decades to come.
Its proposed £20.9bn package to upgrade the grids includes £2.7bn of upfront funding to increase overall capacity.
Ofgem’s strategy will also look to improve customer service, domestic resilience to prevent power outages, and pave the way for cheaper, greener, home-grown energy to bring down bills in the long-term.
This follows extreme weather events such as Storm Arwen , which left more than a million homes without power last November, and the Government’s pledged expansion of renewables as part of its supply security strategy.
Brearley said: “We’re confident that the five-year vision we’ve outlined will help build the world class energy infrastructure needed to connect consumers to reliable, cleaner energy at an affordable price.”
The developments gained a positive reception in the retail market, with Good Energy boss Nigel Pocklington arguing that the ramp-up was essential to meeting consumer’s electricity needs.
He said: “We know people are eager to use lower carbon, better options like EVs and heat pumps, and how quickly renewables can be deployed. This is the tech that will bring bills down in the long term. We need the network infrastructure to keep up, so that everyone can benefit.”
“There is less time to decarbonise the UK power grid than has passed since the 2008 financial crisis. It is not going to happen without significant investment, so it is good to see Ofgem recognise the scale of the challenge, including front loading investment in readying the network for clean tech.
Network operators in watchdog’s crosshairs with plans to cut profits
Ofgem has insisted household energy bills will not rise in response to the spending plans.
Instead, most consumers would see a small drop in costs related to network charges if the plans are enacted.
Rather than raising energy costs further, the watchdog plans to cut baseline annual rates of return for the UK’s Distribution Network Operators (DNOs) limiting the charges they can earn from charges on consumers’ energy bills.
Ofgem wants to impose limits of 4.75 per cent for the five years from April 2023 – down from current rates of 6.8 per cent, as part of its draft plans for upcoming electricity distribution price controls (known as RIIO-ED2).
These controls set the framework and revenue for the 14 DNOs across the country – which are currently overseen by six companies.
Ofgem argues that the changes will mean the UK can accommodate a significant increase in net zero investment without increasing network charges.
The average energy user currently pays around £100 per year to meet the costs of operating, maintaining and reinforcing local grids, which are essential to the supply of electricity.
Consumers are also facing extraordinary pressure on their energy bills – which spiked to a record £1,971 per year in April amid supply shortages and geopolitical tensions in Europe.
Last month, Ofgem warned the price cap could rise to £2,800 per year in October, while energy specialist Cornwall Insight has forecast £3,000 bills in January – when energy demand will be at its peak in the depths of winter.
DNOs are expected to become increasingly important during the transition, as they will need to build the regional branches of the smarter, greener, more flexible grids and ensure the speedy connection of the growing low carbon technologies required to hit the government’s 2050 net zero target.
Brearley said: “Ofgem’s job is to ensure energy networks have achievable and affordable plans that will attract the investment needed for a more resilient energy network and achieve the government’s net zero ambition at the least cost to the consumer.”
“We’re determined to get the best possible deal for consumers and the proposals we’ve published today will mean that substantial additional investment can be made to deliver net zero without placing any further pressure on bills.”
It is consulting on the draft determinations until 25 August 2022, with the next electricity distribution price control expected to start on 1 April 2023 and run to 31 March 2028.
Companies raise concerns over Ofgem proposals
Reforms to pricing controls have triggered some early resistance across the network industry.
David Smith, Chief Executive of Energy Networks Association suggested that work needed to be done to ensure changes to pricing controls were compatible with energy users expectations of an increasingly environmentally friendly energy system.
He said: “The final determinations will need more work to give us confidence that RIIO-ED2 will be compatible with customers’ expectations of an energy system that enables the transition to net zero. We will work with Ofgem over the coming months to meet this challenge.”
“As well as supporting increasing numbers of low-carbon technology through flexibility and innovation, networks need both sufficient certainty and agility around investment to meet the scale of the challenge at the time customers and communities need them.”
Meanwhile, Scottish and Southern Electricity Networks Distribution (SSEN Distribution), which is part of the SSE Group, described Ofgem’s proposals as “tough and stretching.”
In a statement to the London Stock Exchange, SSE noted the new arrangements would represent an increase of 18 per cent on equivalent allowances in RIIO-ED1.
However, it argued “work is required to ensure the final settlement fully reflects customer and stakeholder needs”.
Basil Scarsella, chief executive of UK Power Networks, also flagged issues with the proposals.
He said: “There are still a number of details to resolve, such as the design of uncertainty mechanisms and the additional investment associated with Ofgem’s proposed access and charging reforms, so that we are able to invest at a pace to match the journey to net zero that our customers and communities wish to take. We look forward to working constructively with Ofgem to finalise these details and bring our plan to fruition.”
Ofgem’s proposals are expected to be contested, with a final decision projected by the end of the year from the regulator.