The UK energy regulator Ofgem has proposed investment-led price controls on regional electricity networks. The new controls will also open the way for local power generation and other developments to help tackle climate change.
The final proposals will govern the revenue of the 14 Distribution Network Operators (DNOs) for five years from April 2010. With an average increase in electricity bills of GBP4.3 a year, householders will get better customer service, improved reliability and a greener electricity supply, Ofgem said.
As part of the price control, Ofgem sets the cost of capital, which is the benchmark return on investment for each DNO. Ofgem has set a 4.7% actual (called vanilla) weighted average cost of capital (using a pre-tax cost of debt and a post-tax cost of equity). Its assessment, assisted by Price Waterhouse Coopers, is that low risk utilities like the DNOs can adequately finance themselves at this rate.
Additionally, Ofgem has set incentive mechanisms that give companies opportunities to boost overall returns. Alternatively, if DNOs fail these incentives, their shareholders, and not consumers, will carry the costs of underperformance.
Alistair Buchanan, chief executive of Ofgem, said: “Our proposals are tough on inefficiency and poor service but are fair in allowing the companies to invest to replace ageing network assets and in improving the environment. The controls provide great opportunities for companies which are more efficient and excel at providing what their customers want – but they will penalise poor performers.
“We have listened to consumers’ expectations of top quality service, reliability, fair prices and environmental improvement for today and for the future.”
The proposed investment returns plus the GBP6.7 billion allowed spend ensure that DNOs can fund the capital expenditure both to replace ageing equipment – some of which is more than 50 years old, and to link the networks to renewable generation.
The DNOs will have an opportunity to bid for cash from a new GBP500m fund earmarked for projects that will combat climate change. This low-carbon fund (LCF) will be available to DNOs and partner companies to use over the next five years to help pave the way for local generation, growth in electric vehicle use and other projects that will be needed to meet Ofgem’s climate change targets.
Ofgem has also reformed the treatment of DNO pension costs to strike a fairer balance between customers, employees and shareholders. This package is inline with incentives faced by other regulated utilities and private companies.