The debate over the next round of price controls for U.K. transmission companies was always going to be a heated one.
In July Ofgem, the U.K’s electricity and gas regulator,published its draft proposals for RIIO-2 — the price control framework for transmission networks during 2021-2026 — after lengthy consultations with the industry. The headline figure is a cap on equity returns of 3.95 percent. A separate framework for distribution networks is still in development.
That 3.95 percent figure is down from the real-world returns on equity across the three operators — National Grid, SSE and SP Energy Networks — of between 8-10 percent, according to data from Ofgem.
Ofgem insists the 3.95 percent cap is enough to attract investment to modernize the country’s grid while also protecting consumers. But the proposals have been met with fierce opposition from the grid and gas network operators themselves. They claim such a low cap on equity returns will stall investment, put the country’s electrification agenda at risk, and even reduce reliability across the network.
Ofgem’s price control framework, known as RIIO (that’s Revenue=Incentives+Innovation+Outputs), will enter its second five-year period (RIIO-2) next year, covering both gas and electricity transmission.
The influential consumer rights group, Citizens Advice, publicly called out the operators for “raking in £7.5B in unjustified profits” during the first RIIO period.
Ofgem denies that politics is at play in the debate. But whatever its motivation for proposing the lower cap, there is a gulf between the draft plan and the companies charged with building much of the infrastructure required to transform the country’s energy landscape.
“Unfinanceable”
Ofgem insists that grid investments can continue under the conditions set out.
“The evidence makes clear that networks can attract investment at much lower rates of return,” an Ofgem spokesperson told GTM by email. “Given the uncertainties of the current economic climate and beyond, our stable, predictable and transparent regulatory regime makes British network companies an extremely attractive proposition for investors around the world.”
“There is strong evidence that investment continues without difficulty for similar returns to our proposals in the regulated U.K. water sector,” the spokesperson added.
But the grid operators disagree. Nicola Shaw, chair of National Grid’s electricity transmission business, signed a letter saying: “The impacts of these proposals are to create unnecessary delay and uncertainty to the delivery of projects supporting net-zero, perverse incentives to delay low carbon connections and avoidable regulatory burden and transaction costs.”
“These consequences manifest as a material depletion in the ability to avoid power cuts in serious weather events, regional impacts associated with specific rejected investments, and higher costs in the future,” Shaw added in the letter to Ofgem, stating the company’s position.
National Grid serves as the system operator in the U.K., while its transmission business holds the monopoly in England and Wales for transmission infrastructure and interconnectors to other countries.
Alistair Phillips-Davies, CEO of SSE, which runs the transmission network in northern Scotland, wrote in blog post that a financial analyst had called the proposals “unfinanceable.”
“It’s absolutely right that Ofgem protects billpayers, but the cost of delaying critical investments will cause us to pay a much heavier price in years to come,” Phillips-Davies wrote.
Ofgem’s proposal leaves the door open to reassessing the price control if extra net-zero investment is needed, for example in areas like EV chargers. However, some in the industry fear this model could slow down progress and add extra bureaucracy, compared to giving the grid operators access to greater revenue for reinvestment from the outset.
Two types of politics at work
RIIO-2 is not happening in a political vacuum. Ofgem has been criticized in the past for rising energy bills and the (very) delayed smart meter rollout. An annual industry poll of utility CEOs has routinely seen more than half claim that Ofgem is “not fit for purpose.”
The U.K.’s National Audit Office, a spending watchdog, said in January that Ofgem errors had seen billpayers overcharged during RIIO’s first period.
At the same time, successive governments in the U.K. have targeted tough measures against the electricity sector as vote winners, be they suppliers or network firms. First, competition was opened up and the so-called Big 6 retail suppliers were cast as the villain. A price-cap was introduced and recently lowered again. The price cap on consumer bills has been blamed, in part, for pushing new suppliers out of the market by limiting their returns.
One industry insider said the politics around Ofgem’s price controls are less about party politics and voter-friendly attempts to cut bills and more about “Whitehall Politics.” Boris Johnson’s government is looking to scale back the public sector. Those considered to be underperforming, or over-funded, will be looking over their shoulder and keen to prove their relevance.
“[Ofgem] hasn’t listened to the customers,”the insider said, adding that the billpayers have demonstrated an interest in safety, reliability and net-zero. “They’ve listened to a view that the network returns were too high in RIIO-1 and just decided to flex their muscles, and show that they are a ‘tough regulator’ by bringing in what many in the industry believe is a draconian level of return.”
Net-zero carbon not an Ofgem objective
Other major infrastructure proposals, including road building and the expansion of Heathrow Airport, have seen the U.K.’s net-zero legislation used against them. After a long-running battle, Heathrow’s third runway was blocked by the courts after environmental groups said the climate impact had not been considered. Such an objection, on climate grounds, to RIIO-2 would be considered a desperate, last-ditch move. All parties would rather find an amicable resolution.
Until then, the network companies have threatened to refer the issue to the Competition and Markets Authority. The CMA would hear any formal appeal against the framework and can adjudicate over alleged errors in Ofgem’s methodology.
One potential root cause of stand-off lies in Ofgem’s remit, which does not explicitly include helping the government reach its target of net-zero emissions by 2050, said Charlotte Hanson, an energy lawyer with ClientEarth.
“Given that Ofgem regulates the second-highest emitting sector of the U.K. economy, this massively impedes the country’s prospects for meeting its targets,” Hanson wrote in an email.
“Through its recent decisions, we’re seeing that Ofgem is failing to build the framework for a decarbonized energy system. This is exactly why we need reform of the objectives that govern the regulator. Without that, how can this country credibly be fighting to meet its climate targets?”
WINNIPEG – The federal New Democrats have kept a longtime stronghold in the Elmwood-Transcona riding in Winnipeg.
The NDP’s Leila Dance won a close battle over Conservative candidate Colin Reynolds, and says the community has spoken in favour of priorities such as health care and the cost of living.
Elmwood-Transcona has elected a New Democrat in every election except one since the riding was formed in 1988.
The seat became open after three-term member of Parliament Daniel Blaikie resigned in March to take a job with the Manitoba government.
A political analyst the NDP is likely relieved to have kept the seat in what has been one of their strongest urban areas.
Christopher Adams, an adjunct professor of political studies at the University of Manitoba, says NDP Leader Jagmeet Singh worked hard to keep the seat in a tight race.
“He made a number of visits to Winnipeg, so if they had lost this riding it would have been disastrous for the NDP,” Adams said.
The strong Conservative showing should put wind in that party’s sails, Adams added, as their percentage of the popular vote in Elmwood-Transcona jumped sharply from the 2021 election.
“Even though the Conservatives lost this (byelection), they should walk away from it feeling pretty good.”
Dance told reporters Monday night she wants to focus on issues such as the cost of living while working in Ottawa.
“We used to be able to buy a cart of groceries for a hundred dollars and now it’s two small bags. That is something that will affect everyone in this riding,” Dance said.
Liberal candidate Ian MacIntyre placed a distant third,
This report by The Canadian Press was first published Sept. 16, 2024
OTTAWA – Prime Minister Justin Trudeau say the Liberals have “all sorts of reflections” to make after losing a second stronghold in a byelection in Montreal Monday night.
His comments come as the Liberal cabinet gathers for its first regularly scheduled meeting of the fall sitting of Parliament, which began Monday.
Trudeau’s Liberals were hopeful they could retain the Montreal riding of LaSalle—Émard—Verdun, but those hopes were dashed after the Bloc Québécois won it in an extremely tight three-way race with the NDP.
Louis-Philippe Sauvé, an administrator at the Institute for Research in Contemporary Economics, beat Liberal candidate Laura Palestini by less than 250 votes. The NDP finished about 600 votes back of the winner.
It is the second time in three months that Trudeau’s party lost a stronghold in a byelection. In June, the Conservatives defeated the Liberals narrowly in Toronto-St. Paul’s.
The Liberals won every seat in Toronto and almost every seat on the Island of Montreal in the last election, and losing a seat in both places has laid bare just how low the party has fallen in the polls.
“Obviously, it would have been nicer to be able to win and hold (the Montreal riding), but there’s more work to do and we’re going to stay focused on doing it,” Trudeau told reporters ahead of this morning’s cabinet meeting.
When asked what went wrong for his party, Trudeau responded “I think there’s all sorts of reflections to take on that.”
In French, he would not say if this result puts his leadership in question, instead saying his team has lots of work to do.
Bloc leader Yves-François Blanchet will hold a press conference this morning, but has already said the results are significant for his party.
“The victory is historic and all of Quebec will speak with a stronger voice in Ottawa,” Blanchet wrote on X, shortly after the winner was declared.
NDP Leader Jagmeet Singh and his party had hoped to ride to a win in Montreal on the popularity of their candidate, city councillor Craig Sauvé, and use it to further their goal of replacing the Liberals as the chief alternative to the Conservatives.
The NDP did hold on to a seat in Winnipeg in a tight race with the Conservatives, but the results in Elmwood-Transcona Monday were far tighter than in the last several elections. NDP candidate Leila Dance defeated Conservative Colin Reynolds by about 1,200 votes.
Singh called it a “big victory.”
“Our movement is growing — and we’re going to keep working for Canadians and building that movement to stop Conservative cuts before they start,” he said on social media.
“Big corporations have had their governments. It’s the people’s time.”
New Democrats recently pulled out of their political pact with the government in a bid to distance themselves from the Liberals, making the prospects of a snap election far more likely.
Trudeau attempted to calm his caucus at their fall retreat in Nanaimo, B.C, last week, and brought former Bank of Canada governor Mark Carney on as an economic adviser in a bid to shore up some credibility with voters.
The latest byelection loss will put more pressure on him as leader, with many polls suggesting voter anger is more directed at Trudeau himself than at Liberal policies.
This report by The Canadian Press was first published Sept. 17, 2024.
The New Democrats have declared a federal byelection victory in their Winnipeg stronghold riding of Elmwood—Transcona.
The NDP candidate Leila Dance told supporters in a tearful speech that even though the final results weren’t in, she expected she would see them in Ottawa.
With several polls still to be counted, Conservative candidate Colin Reynolds conceded defeat and told his volunteers that they should be proud of what the Conservatives accomplished in the campaign.
Political watchers had a keen eye on the results to see if the Tories could sway traditionally NDP voters on issues related to labour and affordability.
Meanwhile in the byelection race in the Montreal riding of LaSalle—Émard—Verdun the NDP, Liberals and Bloc Québécois remained locked in an extremely tight three-way race as the results trickled in slowly.
The Liberal stronghold riding had a record 91 names on the ballot, and the results aren’t expected until the early hours of the morning.
This report by The Canadian Press was first published Sept. 16, 2024.
