Britain’s energy regulator is drawing up plans for a “bailout” scheme for the large monopolies that run Britain’s gas and electricity networks, which would see consumers provide “potentially unlimited” money to companies that run into unexpected financial difficulty and could not make debt payments.
Ofgem has proposed slashing roughly in half the amount network companies such as National Grid, Cadent Gas and Northern Gas Networks, which own the pipelines and cables that deliver gas and electricity to homes and businesses, should be able to pay their investors from 2021.
Networks are in effect monopolies that generate their revenues from consumers, who are charged through their energy bills. Such charges — which cover the costs of maintaining pipelines and cables, and ensuring power supply meets demand, plus any new investments required — make up about a quarter of a typical bill.
In December, Ofgem, which regulates these charges by evaluating the cost of work that needs to be carried out by companies and what would be a fair return, proposed a baseline cost of equity — or how much networks can pay their investors — of about 4 per cent based on current market conditions from 2021, down from 7-8 per cent currently. This new regime will apply to all gas networks and the electricity transmission companies.
However, Ofgem has admitted lower returns may mean companies have “less headroom” over their costs of debt to deal with any unexpected problems.
In a 216-page technical document, it has proposed creating what has been described by Moody’s, the credit rating agency, as a bailout mechanism.
If triggered, consumers would provide “potentially unlimited liquidity to operating companies that would otherwise be unable to service their debt”, said Graham Taylor, a senior credit officer at Moody’s.
Networks that receive cash — which would be charged to customers via their bills — would have up to 10 years to pay it back.
Ofgem told the Financial Times that the proposal, which is open to consultation, is an alternative to setting higher returns for all networks, which it believes, would be “very costly for consumers”.
In the “unlikely event” that a network company experienced “unexpected financial downsides” and had to access the scheme, the regulator insisted they would face a number of restrictions. These would include not being able to make dividend payments, submitting a payment plan to Ofgem and potentially having a representative of the regulator sit on its board.
Ofgem said: “If we conclude that companies are adequately financeable without such a mechanism, it may not be introduced.”
The proposal is likely to reignite debate around the sector, which has come under increased scrutiny in recent years for what consumer group Citizens Advice described as “eye-watering” profits at the expense of households.
The opposition Labour party called in its 2017 manifesto for energy networks, which are owned by a mixture of listed companies, infrastructure investors, sovereign wealth funds and investment banks, to be returned to public ownership.
Alan Whitehead, shadow energy minister, called the bailout proposal a “sweetheart deal”, saying it sent a message to networks not to worry if they ran into trouble as “the customer will pay up anyway”.
Gillian Guy, chief executive of Citizens Advice, said it was “vital Ofgem is able to demonstrate that any such mechanism delivers benefits for consumers”.
Network companies, which have contested Ofgem’s proposed levels of returns from 2021, have also given a lukewarm response to the bailout scheme, questioning the need for it.