Ofgem's RIIO-ET3 Price Control and Its Implications for National Grid's Transmission Investment Viability

The UK's energy transition hinges on a delicate balance between regulatory oversight and private capital. At the heart of this tension lies Ofgem's RIIO-ET3 price control framework, which governs National Grid's £60 billion transmission modernization plan over 2026–2031. As the regulator and the utility clash over baseline returns and incentive structures, investors must weigh the risks of regulatory drag against the long-term potential of a decarbonized grid.

Regulatory Risk: A Clash of Priorities

Ofgem's draft determination proposes a CPIH-real allowed return of 4.49% for National Grid Electricity Transmission (NGET), a 55-basis-point increase from previous periods but still below the company's requested 6.3%. National Grid argues this rate is insufficient to attract the capital needed for a two-and-a-half-fold increase in transmission investment. The utility's £35 billion baseline plan—encompassing 25 new substations, 3,500km of overhead line upgrades, and a 50% emissions reduction—requires a globally competitive return to offset the scale and complexity of its projects.

The regulator, however, prioritizes affordability for consumers, emphasizing cost efficiency and innovation. Ofgem's TOTEX Incentive Mechanism (TIM), for instance, shifts more financial risk to companies for deviations beyond 5% of baseline costs, a stark contrast to the previous 33–49% sharing model. While this aligns with the capital-intensive nature of transmission projects, it raises concerns about project viability in an environment of rising inflation and supply chain volatility.

Incentive Structures: A Double-Edged Sword

Ofgem's incentive framework introduces both rewards and penalties to drive performance. The CSNP-F Delivery ODI-F, for example, offers a 2.5% lump-sum reward for timely completion of strategic projects but imposes steep penalties for delays. While this could accelerate progress, it also creates operational pressure for ETOs (Electricity Transmission Owners) to meet unrealistic timelines. Similarly, the Innovative Delivery Incentive ODI-F—capped at 100 basis points of RoRE—encourages efficiency but may not offset the high upfront costs of R&D and pilot projects.

National Grid's push for streamlined reopener processes and simplified funding mechanisms highlights a critical gap: the current framework's complexity could deter investors seeking predictability. The company's emphasis on a “workable” regulatory environment underscores the risk of regulatory arbitrage, where capital flows to jurisdictions with clearer, more stable frameworks.

Long-Term Infrastructure Returns: A Case for Resilience

Despite regulatory friction, the UK's energy transition presents a compelling long-term opportunity. National Grid's plan to nearly double transmission capacity and connect 35GW of renewable generation aligns with the government's net-zero targets. The transmission sector's structural demand—driven by electrification, decentralized generation, and interconnector expansion—suggests robust cash flow potential post-2030.

However, the path to profitability is fraught. Ofgem's cost assessments, which disallowed 26% of baseline TOTEX submissions, indicate a stringent approach to efficiency. For context, the Business Plan Incentive (BPI) framework penalizes overly optimistic cost projections, rewarding only those that demonstrate “truth-telling.” This could pressure companies to under-promise and over-deliver, eroding margins in the short term.

Investment Implications: Navigating the Crossroads

For investors, the key question is whether Ofgem's final determination in December 2025 will strike a balance between affordability and investability. A 6.3% baseline return, if approved, would signal confidence in the sector's long-term viability, potentially attracting institutional capital. Conversely, a lower return could delay projects, inflate debt costs, and widen the gap between regulatory expectations and market realities.

Historically, UK energy infrastructure stocks have traded at a discount to global peers due to regulatory uncertainty. However, the sector's defensive characteristics—stable cash flows, inflation linkage, and low volatility—make it an attractive hedge against macroeconomic risks. Investors should monitor Ofgem's final decision and National Grid's ability to leverage its £35 billion plan to secure debt financing at favorable rates.

Conclusion: A Test of Regulatory Vision

The RIIO-ET3 debate is more than a negotiation—it's a test of the UK's commitment to its energy transition. A regulatory framework that prioritizes short-term affordability over long-term resilience risks stalling the very infrastructure needed to meet net-zero goals. For National Grid, the stakes are high: a 6.3% return could unlock the capital to future-proof the grid, while a lower rate may force the company to seek alternative funding or scale back ambitions.

Investors should adopt a cautious yet optimistic stance. While regulatory risks persist, the structural demand for transmission capacity and the UK's policy alignment with global decarbonization trends suggest that the sector's long-term fundamentals remain intact. The coming months will be pivotal—December 2025's Final Determination could either cement the UK as a leader in clean energy infrastructure or expose the fragility of its regulatory model.