Asset risk premium relative to debt risk premium
As part of the Energy Networks Association’s response to Ofgem’s RIIO−2 Sector Specific Methodology (‘SSMD’), in March 2019 Oxera submitted evidence to Ofgem on how its proposed allowance on the cost of equity compared with the pricing of risk for these companies in the debt markets (the ‘Oxera ARP−DRP report’). We explained that the ARP−DRP differential can be used as a cross-check for the appropriate level of the allowed cost of equity.
In this report, we update the analysis presented in the Oxera ARP−DRP report and the 2019 cost of equity update, by (i) including the newly available data from the bond markets; (ii) adopting a revised approach to the risk-free rate set out in a recent Oxera submission to the CMA; and (iii) improving the methodologies used for our analysis in response to Ofgem’s concerns set out in the RIIO−2 SSMD.
