Ofgem, the UK’s energy regulator, is to cut the profits that electricity distribution companies can make by a third as part of a new green-focused pricing regime.
The regulator said the new arrangements will boost investment to cut polluting greenhouse gas emissions from cars and unlock more flexible local grids.
Surface transport and domestic heating account for 34% of the UK’s greenhouse gas emissions, Ofgem said.
“The new price controls for the DNOs, known as RIIO-ED2, will significantly boost green investment to local networks and drive a major change in the way Britain travels, heats and powers its homes.”
Under the new pricing regime the UK’s 14 DNOs, which are companies such as SSE PLC (LON:SSE), will have the return (profit) allowed from their net assets reduced to 4.4% from 7% currently. DNOs are local monopolies that build and run the infrastructure that carries electricity to homes and businesses.
Revenues will be reduced from current levels, added the regulator, which would cut network charges on consumers bills by 9%.
Jonathan Brearley, Ofgem’s chief executive, said: “Our price control for local electricity networks paves the way for turning Britain’s streets green, unlocking the investment needed to support the UK, Scottish and Welsh Government climate change targets, particularly around the electrification of transport.
“At the same time, these financial arrangements will significantly cut investor returns to make sure consumers pay a fair price for energy whilst networks attract the investment they need to be safe and green.”
“The Price Control drives DNOs to be proactive in ensuring the local grids are ready to cut greenhouse gas emissions, as they are best placed to know where new investment is needed to accommodate increasing demands.”
Ofgem regulates the rate of return DNOs can make on investment, which ultimately is paid for through consumers’ bills.