Shares in transmission network operator National Grid (NG.) and energy group SSE (SSE) traded 1.6% and 2.6% higher respectively on Tuesday on relief that the final review of the supply market by regulator Ofgem wasn't as bad as feared.
The current regime allows gas and electricity companies to make a baseline return on assets of around 7.8%, but this was set to roughly halve to 3.95% under initial proposals from Ofgem in July.
The allowable return on regulated assets has now been raised to 4.55%, which includes an assumption that companies will be able to outperform the baseline rate of 4.3%.
The regulator wants to reduce allowable returns to bring them into line with the lower interest rate environment, and for energy suppliers to pass efficiencies on to consumers in the form of lower monthly bills.
Ofgem said, ‘we want to make sure consumers’ money goes towards improving the network and fighting climate change rather than on returns that are not in line with the level of risks taken by investors.’
Consumers are expected to save around £10 per month on their bills as they receive a greater share of cost efficiencies.
Having taken on board criticism following the initial consultation period about the need for more investment, Ogem has increased the amount of allowable investment to deliver cleaner energy by £5 billion to £30 billion over the next five years.
A further £10 billion could be made available to accelerate strategic 'green' investment projects.
Investment director at AJ Bell Russ Mould commented, ‘Predictably SSE, National Grid and their peers are still unconvinced by this latest offer and the authorities face the task of balancing the need to incentivise investment in renewables and other low-carbon energy sources while also looking to protect the consumer.’
Managing director of SSEN transmission Rob Mcdonald said, ‘at this stage in our assessment, we continue to have concerns and will need to reflect further as we review and analyse the full settlement in the round over the coming weeks.’