UK Boosts Grid Investors’ Returns in Push for Cleaner Power
(Bloomberg) -- The UK energy regulator plans to boost profits for companies investing in the grid to underpin a huge push to upgrade critical infrastructure over the next five years.
Ofgem proposed a cost of equity of up to 6% for private investment in grid companies, according to its draft determinations for 2026-2031. That compares to 4.55% during the previous five years. National Grid Plc, SSEN Transmission and Scottish Power were among the utilities with plans that sought as much as 6.9% returns.
Grid upgrades are a challenge for the government, in part due to local opposition to new pylons and overhead lines, but also because of the high costs, which will drive up consumer bills. However, boosting wind and solar generation to ensure a clean power grid by 2030 isn’t possible without overhauling the network.
SSE said Ofgem’s proposals for returns were “not commensurate with globally competitive market rates, robust market evidence, and the significant business risks of investing in electricity transmission.”
However, RBC Europe Ltd. said in a note that returns were “aligned to the market average expectation” despite being less than what companies asked for. The proposals will be under consultation until the final decision in December, allowing firms to try and push for more.
The UK’s grid is regulated, meaning Ofgem decides what returns transmission operators can get, how much capital investment can be spent and the size of the incentives linked to performance. It needs to walk a fine line in making decisions that encourage investment toward reaching net zero targets while still protecting consumers from soaring bills to pay for those upgrades.
Shares for National Grid Plc rose as much as 1.8% in early trading, while SSE Plc rose as much as 1.4%.
Ofgem’s plan allows companies to spend £24.2 billion ($33 billion), around 26% lower than what they had proposed. The regulator said the need for efficiency in capital allocation, which in some cases meant determining a project was not needed, drove the investment figure lower.
Ofgem said an upgraded network would allow for more renewables and less gas, trimming wholesale energy costs by around £25. Still, the increased spending will trickle down to consumers with network charges on bills estimated to rise by £104 by 2031.
“The sooner we build the network we need, and invest to strengthen our resilience, the lower the cost for bill payers will be in the future,” Ofgem chief executive Officer Jonathan Brearley said.
The importance of investment in this type of critical infrastructure has come to the forefront after the April blackout in Spain and Portugal. Ofgem said the proposal would include overhauling 4,400 kilometers (2,730 miles) of overhead lines and would allow up to 126 gigawatts of clean power generation to be connected to the grid by 2030.
(Updates with details throughout.)
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