Ofgem’s approval of a £24bn investment in expanding the energy grid, and the £102 bill increase that will pay it, is an acknowledgement that cleaner, more predictable and hopefully cheaper prices in future will only come at a price today.
The investments given the green light today, £10bn of which will be spent by the three electricity grid operators in England, are fundamental to the UK’s energy transition.
They will pay for new high-voltage cables, on pylons, underground and undersea, along with new substations and circuitry required to connect new renewable sources, primarily offshore wind, to the people who need it.
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It is a massive and ambitious project that will ultimately cost £80bn with the goal of delivering a clean power grid.
The aim is to reduce both emissions and the UK’s reliance on volatile wholesale gas markets, which both underpin electricity supply today, and set the price in the market, even when renewables provide the majority of supply.
That volatility saw domestic bills rise above £4,000 in the wake of Russia’s invasion of Ukraine, prompting Liz Truss to authorise a £40bn state subsidy to cap bills at £2,500 for every household in the country.
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Bills must rise to pay for energy transition
An expansion of renewables and storage capacity alongside new nuclear should at some point in the future tip the balance so gas is no longer king in the UK market.
To get there however we are all going to have to pay upfront, in the shape of subsidies and price guarantees to incentivise the building of renewables, and the increase in “network costs” announced by Ofgem today.
Over time these investments should deliver tangible savings. These will include an end to “constraint payments” paid to power stations and wind farms to switch off in times of excess supply because the grid can’t handle the load. They cost customers more than £1bn last year and are forecast to more than double before new infrastructure brings them down.
Ofgem say that will save around £80 per household, cutting the net cost expansion to just £24 per-household per-year.
The private companies delivering the investment meanwhile – National Grid in England and SSE and Scottish Power in Scotland – will receive a return on their investments of 6% on equity, an average of 5.57% on debt, and be permitted to take dividends of 3%.
A fair return says Ofgem. Consumers will want service and prices to match if they are to agree.
