By Kristy Dorsey

Energy network operators have said they are concerned and disappointed with new investment arrangements even though regulator Ofgem has relaxed its crackdown on company profits first proposed in the summer.

In its spending programme covering the next five years, Ofgem said it will allow the network operators – National Grid, SSE and ScottishPower – to invest at least £40 billion in infrastructure upgrades to fight climate change. These improvements to the pipes and wires that transport gas and electricity around the UK are funded through customers’ bills.

The regulator, headed by Jonathan Brearley, provoked a backlash in July when it initially proposed to limit spending to £25bn. It also said it intended to cut the returns on these investments – the profits made by the networks and their shareholders – to a record low of 3.9 per cent, down from the 7-8% allowed in recent years.

Network operators reacted furiously at the time, saying the move would drive investors to markets with superior returns than those on offer in the UK.

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Ofgem has now said that it will allow operators to make returns of 4.3% on new network investments. This will lead to savings of £10 a year on the average domestic energy bill, the regulator said, down from the £20 it originally envisaged.

Mr Brearley said Ofgem’s £40bn package will “massively boost” clean energy investment in the UK, ensuring that network companies can deliver on the climate change ambitions laid out last week by the Prime Minister.

“These costs must fall fairly for consumers,” he added. “We are reducing the amount paid to shareholders so that they are closer to current market levels.

“This means that companies can attract the vital investment we need whilst making sure that consumers don’t pay more than is necessary to achieve this.”

ScottishPower gave the new five-year programme, which takes effect on April 1, a lukewarm response. The reaction from SSE’s transmission arm was similarly guarded, with a “cautious welcome of Ofgem’s movement on a number of fronts”.

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“However, 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,” said Rob McDonald, managing director of SSEN Transmission.

“In doing so, we will work constructively with Ofgem and other stakeholders as we consider our options and remain ready to invest the billions required to build a network for net zero, subject to an acceptable and investible overall price control settlement.”

ScottishPower chief executive Keith Anderson warned in July that Ofgem’s original proposals would threaten the creation of hundreds of new jobs at a time when rising unemployment is a major concern. This is because ScottishPower parent company Iberdrola operates in a dozen countries around the world, including many where investment returns are more attractive.

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Speaking yesterday, Mr Anderson said: “This is a large and complex document and we will now take our time to analyse it in full and consider our next steps.

“We remain concerned that Ofgem’s proposals on the headline rate of return will not attract the global investment our transmission business requires if we are to support the clear net zero ambitions of the UK and Scottish governments, including the Prime Minister’s ten point plan.”

However, Ofgem’s announcement was welcomed by the consumer group Citizens Advice as “genuine progress”. It has said that the regulator could cut network returns by a further £1.7bn.

“For too long network companies were able to make excessive profits, not because they were efficient firms, but simply because previous price controls were too generous,” acting chief executive Alistair Cromwell said.

“We recognise these are hugely complex decisions in which the regulator has to balance value for consumers against profits and shareholder returns. Although we are pleased with this progress, we’ve argued that Ofcom could have gone further in limiting shareholder returns and still believe that to be the case.”