Shares in National Grid (NG.) dropped 4.4% to 859p and SSE (SSE) fell 2.5% to £13.1 today after the energy regulator Ofgem unveiled proposals to halve the returns the companies are allowed to make over the five-years from April 2021.

National Grid said it was ‘extremely disappointed’ and ‘the proposal leaves us concerned as to our ability to deliver resilient and reliable networks, and jeopardises the delivery of the energy transition and the green recovery,’

SSE said it was ‘disappointed and deeply concerned’ by the proposal adding ‘it falls short in seeking to attract the significant investment required’ to deliver net zero emissions by 2050.

The costs of building and maintaining the nations’ electricity and gas infrastructure are recovered through consumers’ energy bills and represent around a fifth of the average bill.

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Under Ofgem’s proposals less of consumers’ money will go towards network companies’ profits and more towards network improvements, saving £3.3 billion over the next five years.

In addition the regulator wants to cut over £8 billion from companies’ spending plans by requiring them to become more efficient. If they want more companies will have to provide ‘robust evidence’ on why the expenditure is needed.

The proposed allowed return on equity will fall by half to 3.95% compared with the current regime and assumes that companies will outperform this level in line with historical experience.

Ofgem proposed a five-year investment programme of £25 billion with a further £10 billion available to help energy networks deliver more clean energy for consumers, including the roll-out of electric vehicle charging and the switch from gas boilers to low carbon alternatives.

The regulator is betting that investors will accept lower returns and continue to invest in the sector due to its stable earnings and supportive regulatory environment. But some analysts aren’t convinced and believe network companies will appeal against the decision.

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Issue Date: 09 Jul 2020