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UK energy networks given 20% more to spend on net zero goal
The upfront funding is for service, maintenance, upgrades and repairs on gas and power grids for the next five years, and is 20% higher than 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.
UK 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 upfront funding is for service, maintenance, upgrades and repairs on gas and power grids for the next five years, and is 20% higher than 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.
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 “package massively boosts clean-energy investment,” said Jonathan Brearley, chief executive officer of Ofgem. “This will ensure that our network companies can deliver on the climate change ambitions laid out by the Prime Minister” and maintain reliability.
As well as the infrastructure funding, Ofgem also set the five-year price control that limits the returns utilities can make. While the base return rate of 4.3% a year is more than initially proposed, it’s down from about 7% in the previous five-year plan.
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 But it’s a balancing act for Ofgem which has to avoid being tied in to funding projects that may prove to be outdated as technology advances.
When it comes to spending, SSE Plc will get 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. Theses allowances have all increased since the draft decision in July, according to Sanford C. Bernstein & Co. LLC.
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.
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.
“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.
SSE rose 2.4% to 1,396 pence a share, while National Grid gained 1.8% to 875.2 pence in London. The Stoxx 600 Utilities Index was up 0.3%.
