Utility regulation – Changes afoot

While the gas supply crisis – and its price implications – have dominated the UK price regulated sectors in recent months, other issues have arisen that have seriously tainted the price regulation system itself. Indeed, it is fair to ask whether it is ‘’fit for purpose’’.?

The gas price increases over the past year have been unprecedented, especially in terms of the highly volatile spot market. The graph below, published by Ofgem, shows how much gas prices per therm have risen of late: the data is based on forward delivery contracts.?

Inevitably, over the past year, the impact of surging gas prices, by far the largest component of Combined Cycle Gas Turbine (CCGT) operating costs, has had a profound impact on domestic energy bills: some 22m consumers are now subject to the default tariff price cap. Previously, the price cap was ￡1,277 per year for gas and electricity use by the average household. In April 2022, the figure was raised to ￡1,971, an increase of 54% in a single year. Those using the prepayment mechanism pay an additional ￡36. Moreover, consumer pain will worsen when the default price cap is reviewed in October – the expectation is that the energy price cap will, in all probability, exceed ￡3,000.

Ofgem has published a chart of the default price cap’s level; it shows how steeply it has taken off over the past year.?

While Ofgem is attempting to tackle the impact of the surge in gas prices, along with the numerous bankruptcies in the energy supply market, it is also undertaking the periodic distribution review of the 14 DNOs. The determinations will apply as from April 2023 and will last until March 2028. It is still early days, with final determinations some months away, but National Grid, the owner of Western Power Distribution, has already responded, in very general terms, to various initial proposals that will see markedly higher investment. Ofgem has also announced a review of the electricity market arrangements. Currently, the gas price often sets the marginal generation price – hardly an ideal arrangement when gas prices, as at present, are soaring. Although it will not contribute – for at least a decade – to solving the current gas crisis, either in terms of price or availability, the government seems wedded to the belief that further investment in new nuclear-build is necessary. Since the Advance Gas-cooled Reactor (AGR) programme in the 1980s, only one new nuclear plant, Sizewell B, has come on stream – in the mid-1990s.?

To be sure, the construction of Hinkley Point C is well under way. Despite many delays and costs that are way above budget, the plant is likely to be commissioned by 2027 at the earliest – around a decade behind the original target date. Looking forward, the government has just given planning approval, against the recommendations of its own Planning Inspectorate, for the construction of the 3,200MW Sizewell C plant, with an estimated ￡20bn cost. There are well-founded concerns about water supply, among many other issues.?

Funding the proposed new plant will be extremely challenging. The soon-to-be-fully nationalised EdF will be central to the project, with Chinese investment now far less likely. To make new nuclear-build more financially attractive, the government has indicated that its Regulated Asset Base (RAB) model, used for the Thames Tideway Tunnel sewerage project in London, is likely to be implemented. It will enable investors to receive financial returns while the plant is being built rather than having to wait for its commissioning, which – as nuclear new-build has so often shown – may well be seriously delayed. In the shorter term, the ramping-up of offshore wind investment seems set to continue.?

The latest auction saw a Contract for Difference (CfD) awarded at just ￡37.35p per MW – some years ago, the comparable figure was well in excess of ￡100 per MWh. The latest strike price also compares very favourably with the ￡92.50p (2012 prices) per MWh strike price granted for Hinkley Point C, which is due to be commissioned within the next five years.?

Significantly, too, National Grid has just announced a massive ￡54bn investment programme, a substantial part of which is earmarked for improving connections between offshore wind plants and the Grid’s transmission backbone.?