The energy regulator has confirmed it will pursue even tighter restrictions on how much profit energy companies can make, in a move it said will result in lower prices for customers.
Ofgem has unveiled its desired methodology for the second energy price cap, which is expected to save consumers around £6 billion over the five years to 2026.
The agreed method sets the allowed baseline return on equity at 4.3% in a cost of equity range of between 4% and 5%.
This is almost half the limit imposed in the previous cap and would be the lowest ever capital rate for energy network companies.
Ofgem will also increase support for the most vulnerable customers with incentives to encourage firms to take this into account. New innovation funding will be made available to support projects that benefit vulnerable or poorly-served consumers.
Environmental concerns are also included in the plans. Each company’s environmental action plan will be taken into account when funding allowances are set and another fund will be set up to support eco-friendly investments.
Jonathan Brearley, executive director for systems and networks at Ofgem, said: “Lowering the cost of capital for network energy companies will put money back into consumers’ pockets while service standards are required to remain high.
“Our new price control for networks will pave the way for a cheaper, smarter and more sustainable energy system and is a key step in our journey to a low-carbon future.”
The controls will take effect in 2021, with final terms being set in November next year.
National Grid said it was “pleased” to see the refined approach to incentives and recognised some corrections to calculations on the cost of equity.
But the group added: “We remain disappointed with the proposed range, which we believe does not fairly reflect the level of risk borne by networks. In the context of the role that networks will play in enabling the transition to a more efficient and decarbonised energy system, we believe this is not in the long-term interests of consumers.”
Citizens Advice called for Ofgem to “hold its nerve” and stick with the proposed caps.
Chief executive Gillian Guy said: “Ofgem has made significant progress so far, but the acid test will be the final outcome.
“The regulator will face intense industry pressure to water down these measures in the coming months. It must hold its nerve and deliver a price control which is good value for consumers.”
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