Utility Week

UTILITY WEEK | 31ST MAY - 6TH JUNE 2019 | 11 Policy & Regulation This week Networks face low returns under RIIO2 Price control would mean baseline return allowed would be 4.3 per cent if applied today Ofgem has confirmed the method it will use to calculate the second round of RIIO price controls. If applied today, the baseline allowed return on equity would be set at 4.3 per cent, based on the new CPIH measure of infla- tion that Ofgem intends to adopt. Although slightly higher than the 4 per cent figure suggested by the regulator in December, Ofgem says it is the "low- est ever" rate proposed for energy networks and repre- sents a 50 per cent reduction on the current level. Combined with lower allowances for the cost of debt, the cut is expected to save consumers £6 billion over the five-year price controls – £25 per household per year. Jonathan Brearley, Ofgem's executive director for system and networks, 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." The announcement was welcomed by Citizens Advice, which has previously said energy networks are on course to earn £7.5 billion of "unjustified profits" over the current price controls. Chief executive Gillian Guy said: "This announcement takes us another step towards a settlement that prevents this from happening again." "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 con- sumers." TG WATER Renationalisation is key risk for UU Potential renationalisation of the water sector has been cited as a current "key area" of risk and uncertainty for United Utilities. In its financial results for the year ended 31 March 2019, the water company highlighted that in the event of renationalisation the business could be acquired "below fair value". Further details of Labour's plans to bring water and energy networks back into public own- ership have emerged in the past few weeks. Under the proposals, the companies could be sold for a fraction of their market value. Brexit and potential changes to the regulatory regime were also cited by United Utilities as key risks, issues and uncertain- ties, along with further market reform, including upstream competition in water resources and bioresources. ENERGY Ofgem to consult on price cap removal Ofgem is to consult on the condi- tions required for the regulator to make a recommendation on the future of the price cap "in the next few weeks". The price cap, which came into effect on 1 January this year, is a temporary measure that will lapse in 2023 at the latest. Speaking at Utility Week Live at the Birmingham NEC, Ofgem's executive director of consumers and markets, Mary Starks, said the circumstances in which the regulator would want to li£ the cap before 2023 is something it had given "a lot of thought to". "We can't go back to the kind of public distrust that gave us the cap in the first place." Starks said the discussion will focus on the conditions for effective competition and legisla- tion as part of its requirement to make a recommendation to the government as to whether to li£ the cap. ENERGY MPs launch carbon capture inquiry MPs have launched an inquiry into carbon capture and storage (CCS) in a bid to bolster the case for extra support for the sector in the upcoming pan-government spending review. The All-Party Parliamentary Group (APPG) for CCS announced its "Greening Britain through CCS" inquiry. A review is designed to determine what government action will be needed over the forthcoming spending review period, which will extend from 2020-23. This should enable the first CCS clusters to be developed by the middle of the decade. Brearley: service standards must remain high Political Agenda David Blackman "The next prime minister will face challenges aplenty" So Theresa May's term will end in June a£er she resigned last Friday ahead of the worst ever results for her Conservative Party in a national election. The prime minister got off on the wrong foot with many in the industry by scrapping the energy and climate change department. That reflected her then chief aide Nick Timothy's climate change scepticism. However 2017's humiliating general election, in which the Conservatives emerged as largest But will Britain be entrusted with this key event when its gov- ernment is in chronic chaos? More broadly, the creeping Brexit-related paralysis across government means that deci- sions on the future financing of the nuclear programme and the decarbonisation of heat are slip- ping behind schedule. The next PM will face challenges aplenty. That must include getting the government's efforts on the energy and climate change agenda back on track. party in the House of Commons but without a majority, triggered a change of tack. Claire Perry was appointed energy and climate change minister. Some of what were seen as the government's most damaging decisions, notably the axing of support for carbon capture and storage a£er the 2015 general election, have been partially reversed. And in the early days of May's premiership, the go- ahead was given for the Hinkley Point C nuclear plant. The government has also embraced the climate change agenda by pitching for the UK to host next year's UN summit on the issue.

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