Energy networks have recently submitted their final business plans to Ofgem in advance of the forthcoming RIIO price controls for transmission and gas distribution.

Oxera prepared updated estimates of the cost of equity to inform the companies’ business plans. The report reflects new evidence from capital markets since the Oxera report from Q1 2018, as well as updates based on or in response to further thinking and evidence presented by various parties during Ofgem’s consultations culminating in the RIIO-2 sector specific methodology decision (SSMD).

Specific methodological issues addressed in this report include:

• adjustments to the historical data on CPI and RPI to make these series more comparable with how these measures of inflation are defined today;
• the use of different averages (arithmetic and geometric) to derive an unbiased estimate of the market discount rate based on historical data;
• estimating betas for energy networks from a sample of listed comparators;
• the impact of political risk on observed betas and required returns.

The report also considers the financeability of networks from the perspective of equity investors by comparing the asset risk premium (unlevered equity risk premium) to the debt risk premium, and benchmarks this against a large sample of bonds issued by UK utilities.