Ofgem green light for £5bn energy upgrade

The owners of Britain's gas and electricity transmission networks will be allowed to invest up to £5bn over the next five years to meet the country's energy needs under initial proposals announced yesterday by the regulator Ofgem.

This is more than double the amount spent over the past five years, but it is a long way short of the £6.9bn the four companies said they needed to spend in their submissions.

The impact on domestic customers will be limited as transmission charges account for just 2 to 3 per cent of household energy bills.

Ofgem said that the four companies - National Grid Gas, National Grid Electricity, Scottish Power and Scottish Hydro-Electric - would be allowed to spend £4.25bn between 2007 and 2012 to connect up renewable energy and gas import projects to their networks, with the possibility of a further £750m of investment being allowed.

The regulator has also proposed a reduction in the return allowed on the investment from 4.4 per cent to 4.2 per cent because of lower real interest rates.

The companies should look to cut their operating costs by 1 per cent to 1.5 per cent a year, Ofgem added.

Alistair Buchanan, Ofgem's chief executive, said the proposed price control was designed to be flexible because of the uncertainty surrounding the timing of projects.

Ofgem will announce final price controls in November once the companies have had a chance to respond to its initial proposals.

The new controls take effect in April next year.