Ofgem approves £24 billion grid overhaul

LONDON Mon Dec 17, 2012 5:54pm GMT

The sun rises behind electricity pylons near Chester, northern England October 24, 2011. REUTERS/Phil Noble

The sun rises behind electricity pylons near Chester, northern England October 24, 2011.

Credit: Reuters/Phil Noble

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LONDON (Reuters) - British energy regulator Ofgem on Monday approved 24.4 billion pounds of investment by energy companies to overhaul the country's gas and electricity grid, reducing initial overall spending plans by 16 percent to 2021.

Ofgem is responsible for delivering the most cost-effective investments possible as part of plans to modernise Britain's ageing energy networks between 2013-2021.

Energy companies initially proposed spending 45.4 billion pounds on upgrading and maintaining the country's energy networks until 2021, which would be clawed back through higher energy bills.

Ofgem's latest proposal, which aims to curb energy spending plans in order to reduce the impact on utility bills, reduces that figure by 16 percent to 38.2 billion pounds.

Even these scaled-back proposals are expected to add 15.1 pounds a year to consumer bills by 2021, Ofgem said.

Within the 38.2 billion pounds, 24.4 billion will go towards modernising the energy grid, up 2 billion compared with initial proposals made in July following a row over the budget.

Initial proposals made by the regulator were slammed for being too low by the country's biggest energy distributor, National Grid, in July.

The company said in a separate statement on Monday that it would take time to review the updated proposals before deciding on its response.

National Grid is most directly affected by Ofgem's proposals since it makes 60 percent of its operating profit from electricity and gas transmission, Seymour Pierce utilities analyst Angelos Anastasiou said in a note.

"(Ofgem's) proposals are long and complicated but, at first glance, they seem to be pretty similar to the initial proposals (IP) that were issued in July," Anastasiou said.

"A dividend cut and/or fund raising remains a possibility, but the market does not appear to be currently factoring this in," he said, referring to National Grid, which has 75 days to accept or reject Ofgem's proposals.

Fast-rising consumer energy bills have caused anger in Britain among households squeezed by spiralling price rises and muted wage growth. A government advisory group said on Monday that a further 300,000 households risked 'fuel poverty' this winter.

"This provides a framework of strong incentives and penalties to stimulate the innovative and efficient operations of Britain's energy companies," Ofgem's chairman John Mogg said in a statement.

The regulator said its final plans earmarked up to 15.5 billion pounds to upgrade transmission networks for both gas and electricity, assets operated by National Grid.

Of the total investment approved by Ofgem, 4.5 billion pounds will be held back unless energy companies can justify the expenditure over the 2013-2021 investment period, it said.

The 24.4 billion pound price control comes on top of a 7.7 billon pound investment from network charges approved in April for Scotland's network operators.

A study by the Energy Networks Association (ENA) in November found that Britain's power grid faces its biggest challenge since its creation due to a transition being made to a low carbon economy.

The ENA study found that the power grid will need up to 1.6 billion pounds in investment a year to cope with the integration of renewable power capacity such as wind farms.

($1 = 0.6204 British pounds)

(Reporting by Sarah Young and Oleg Vukmanovic; editing by Rosalba O'Brien and Keiron Henderson)

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