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Ofgem greenlights price hikes to pay for grid upgrade

Energy regulator Ofgem today gave electricity network operators permission to increase prices over the next five years to help pay for a 40 per cent increase in spending on grid infrastructure, designed to support the rollout of renewable energy and smart grid technologies.

An average increase in domestic electricity bills of £4.30 a year from 2010 to 2015 will allow the 14 distribution network operators to invest £6.7bn in modernising the grid.

The higher bills, which will also affect business customers, will lead to the creation of a new £500m Low Carbon Fund. Network operators will be able to bid for cash from the fund to help finance innovative projects that will combat climate change, such as those designed to support local power generation technologies or increase grid capacity to cope with an anticipated growth in electric vehicle use.

"Its objective is to encourage companies to be more innovative with new technologies and commercial arrangements," said Ofgem chairman Lord Mogg, adding that it provided evidence of the increasingly proactive role Ofgem is playing in supporting low-carbon energy projects.

The investment programme will also help to enhance the efficiency of the UK's energy grid. Parts of the grid are up to 50 years old and according to some figures, electricity lost during transmission through distribution networks accounts for 1.5 per cent of Britain's greenhouse gas emissions.

Ofgem said that upgrading networks with more modern, efficient equipment will improve power efficiencies and help cut emissions even before the money from the Low Carbon Fund.

The regulator will also strengthen penalties, known as "the losses incentive " for distributors that do not reduce energy losses, and require all operators to report annually on their carbon footprint.

In addition, new rules will be introduced that allow network operators to develop new charging arrangements from April next year that are designed to better reward customers who make less use of the network by generating their own electricity or by improving their energy efficiency.

However, despite the new investment and pricing programme, David Smith, chief executive of the industry body the Energy Networks Association, said that distributors may still face problems raising the necessary funding required for upgrade work.

"Such investment will require funding from the financial community at a time when the overall spend on electricity infrastructure alone, directly attributed to meeting the 2020 targets, could total some £30bn in the three years 2012-2015," he said. "Ofgem's proposal to set the cost of capital for the companies at only four per cent in real terms (after tax) was considerably lower than anyone had anticipated."

The operators now have until 6 January to respond to Ofgem's final proposals.

In related news, the government's energy bill will today receive its second reading in the House of Commons. Under the proposed legislation, Ofgem's remit would be extended to ensure that climate change and energy security issues have to be considered when it assesses consumers' interests.

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