Energy companies have been given the green light to spend nearly £24bn on Great Britain’s electricity grid, in a move that will further increase household bills.
In its draft verdict on price controls for energy network companies, the energy watchdog, Ofgem, approved more than £15bn to be spent on gas transmission and distribution networks in the five years to 2031.
A further £8.9bn will be invested in the nation’s high-voltage electricity network – the biggest expansion of the grid since the 1960s – with a further £1.3bn earmarked on top of that.
The funding will allow 80 big energy infrastructure projects to be completed by 2030 and comes amid a push by the government to boost the UK’s renewables sector to help improve energy security.
However, to cover the cost of the investment, households’ bills will rise by £104 by 2031 – £30 for gas networks and £74 for the electricity grid. This means an extra £24 a year on bills, which remain higher than before the energy crisis, which began to escalate in 2021.
The regulator added that bills would be even higher – about £30 more – without the investment, because the funding will allow the UK to make “better use of our clean renewable energy so we are not having to pay for expensive gas plants to serve demand”.
Labour has faced questions over the cost of its plan to switch to a clean power system by 2030, which it has said will ultimately lead to lower bills.
Jonathan Brearley, the Ofgem chief executive, said major investment in the energy networks was vital to “ensure the system has greater resilience against shocks from volatile gas prices we don’t control”.
He added: “Doing nothing is not an option and will cost consumers more – this is critical national infrastructure. The sooner we build the network we need and invest to strengthen our resilience, the lower the cost for bill payers will be in the future.”
On Tuesday, Ofgem’s quarterly price cap took effect, reducing a typical annual dual-fuel bill for households by 7% to £1,720.
Analysts at the leading forecaster Cornwall Insight expect the price cap to fall by a further £22 – a drop of about 1% – to the equivalent of £1,698 a year for a typical dual-fuel consumer in October.
Cornwall highlighted uncertainty caused by Israel’s airstrikes against Iran and Tehran’s retaliation, which pushed up wholesale energy prices. However, prices have recently fallen back as a ceasefire continues to hold.
The cap remains hundreds of pounds above pre-pandemic levels, even when adjusting for inflation, and it is unlikely that prices will reduce substantially over the next few years, the consultancy warns. It is predicting a further small fall in the cap in January followed by a slight rise in April.
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Ofgem’s draft verdict on energy network spending includes proposals to increase the returns that investors can get on equity put into grid companies. A final decision will be published by the end of the year.
Brearley insisted the regulator had built in cost controls into its plan and negotiated a fair deal for investors and consumers. “We won’t hesitate to intervene if network companies don’t deliver on time and on budget,” he said.
Ofgem proposed a cost of equity of 6% for private investment in grid companies, up from 4.55% in the previous five years. National Grid, SSEN Transmission and Scottish Power are among the utilities submitting plans, and had asked for up to 6.9% in returns.
SSEN’s parent company SSE said Ofgem’s proposals for returns were “not commensurate with globally competitive market rates, robust market evidence, and the significant business risks of investing in electricity transmission”.
However, SSE’s share price rose by 0.85%, National Grid increased by 1.2% and Scottish Power’s Spanish owner Iberdrola was up by 0.6%, suggesting shareholders were cheered by the Ofgem announcement.
Lawrence Slade, the chief executive of Energy Networks Association, which represents the UK’s electricity network operators, said: “The next five years are vital for defining the future shape of the UK’s energy system and securing the funding to deliver it. Ofgem’s recognition of the need for unprecedented levels of investment in the electricity transmission network is significant.”