Yahoo Finance Battle looms as watchdog slashes energy networks' profits
Energy suppliers are bracing for a showdown with regulator Ofgem over a controversial £25bn spending plan which will hammer their profits.
Major players including Scottish Power are furious after the watchdog announced it would halve the profits which they are permitted to make, shaving £20 a year off the average household bill.
The proposals - announced as part of Ofgem's latest five-year plan for the industry - have sparked claims that companies will be so tightly squeezed there is no money left for investment in infrastructure.
Scottish Power chief executive Keith Anderson claimed that regulators had“completely flunked” the first test to prove their green credentials by doing too little to bolster spending on clean power.
Because Ofgem has cut firms' permitted profits, it has also had to reduce the amount of this money which must be spent on investment. Firms have been told to plough £25bn into upgrading the country's power network, and £10bn into measures to cut carbon emissions - much less than the industry expected.
Bosses are now calling for freedom to charge more, allowing them to both make higher profits and increase spending.
Mr Anderson said: “I’m lost for words. I’m completely stunned.”
“They haven’t just missed the target, they’ve missed the wall the target is on.”
He added that the “unbelievable” decision to slash returns would bring the the so-called green recovery to a crashing halt by starving low-carbon schemes of cash.
However, Ofgem said: "Strong evidence from water regulation and Ofgem's offshore transmission regime shows that investors will accept lower returns and continue to invest robustly in the sector."
Network companies also hit back shortly after the announcement was made, claiming that the new rules would leave them with less money to invest in jobs and infrastructure.
Nicola Shaw, of National Grid, said the lower investment levels mean it will take longer to make the industry carbon neutral.
She said: "We are extremely disappointed and the decision will delay net zero. It will stultify it.”
Last December Ofgem pledged to slash consumer bills over the next decade while taking a chunk out of distributors’ profits, in a move that was deeply unpopular with electricity companies.
The regulator sets the prices that companies such as Scottish Power and the National Grid can charge for distributing gas and electricity to homes around the country, while also dictating how much of their profits they must reinvest into the UK’s ageing energy infrastructure.
It aims to protect consumers from suppliers because they are quasi-monopoly players in a lucrative industry.
Ofgem has been under pressure to squeeze the companies harder after being strongly criticised for treating them too generously in the past.
In 2017, Citizens Advice found that energy network companies had overcharged consumers by £7.5bn as a result of a system that was too lenient.
Electricity companies have repeatedly argued that they need to charge consumers more in order to reinvest sufficient amounts of money into improving their networks and reducing emissions.
A number of utility firms vowed to appeal over the ruling to the Competitions and Markets Authority (CMA).
Energy companies have six months to respond to Ofgem's decision before a final decision is made.
Mr Anderson said: “If this doesn’t change, then sadly, this is going to end up in a big regulatory fight.
“The saddest thing about that is, we will miss the opportunity to give thousands of youngsters jobs. We will kiss that goodbye.”
