National Grid to accept £5bn investment plan from regulator

National Grid is poised to accept new price controls unveiled yesterday by the energy regulator which will permit £5bn of investment in Britain's gas and electricity transmission networks over the next five years.

The company, which runs the transmission systems in England and Wales, is expected to agree to Ofgem's proposals, even though they are £1bn short of what the industry had wanted to spend and will restrict the allowed rate of return to less than National Grid had asked for.

Ofgem saidNational Grid and the two other transmission companies, Scottish Power and Scottish Hydro-Electric, would be able to earn a 4.4 per cent return on their investment. This compares with the 4.2 per cent the regulator proposed in September and the 4.9 per cent demanded by National Grid.

About £1bn of the £5bn will be used to connect wind farms to the high-voltage network by beefing up the interconnector between Scotland and England and the existing high-voltage line down the spine of Scotland.

The price controls will result in transmission charges paid by generators rising by 8 per cent next year. In future years, they will rise by 2 per cent in real terms for electricity and by the rate of inflation for gas. As transmission charges account for only 3 per cent of domestic charges, the net effect will be an increase in household energy bills of just £2 to £3 a year.

The price control will contain a "safety net" to protect customers should investment by any of the three transmission companies undershoot planned levels by 20 per cent or more. There will also be arrangements to allow the industry to invest an extra £1bn if it can prove the additional spending is justified.

About 85 per cent of the £5bn investment will be in the electricity network. The remaining £825m will be invested in gas transmission with one big project, a new LNG terminal at Milford Haven, dominating the expenditure.

National Grid said it was going through the fine detail of the Ofgem proposals before making a decision about whether to accept them. However, the company is understood to believe that the regulator has given sufficient grounds to avoid the need for an appeal to the Competition Commission.

Separately, Ofgem announced that domestic gas bills will rise by about £10 next year to allow an extra £946m of invesment in the country's local gas distribution networks. The money will cover increased pension charges and business rates and rising costs of the gas mains replacement programme.