Ofgem, the UK energy regulator, has also warned energy companies that household gas bills must benefit from a fall in wholesale prices.
The regulator said electricity bills would rise by an extra £4.30 a year on average, to ensure 'householders will get better customer service, improved reliability and a greener electricity supply'. The average bill paid per household on electricity is £445 a year.
Ofgem also said that investment in the UK's electricity infrastructure would rise by 40 per cent, to £7.2 billion, compared to the last five years, with £500 million set aside for the low carbon energy fund. The investment figure is eight per cent lower than companies had expected.
Ofgem chairman Lord Mogg said: 'This fund breaks new ground in regulation. Its objective is to encourage companies to be more innovative with new technologies and commercial arrangements. This will allow companies to play a full part in combating climate change.'
Ofgem also decided to 'set a 4.7 per cent actual weighted average cost of capital (using a pre-tax cost of debt and a post-tax cost of equity)', which has been criticised for being 'significantly below all comparators'. Southern and Scottish Energy said: 'Moreover, these were all set before the reassessment of risk and the cost and availability of finance that has characterised global financial markets in the last 18 months.
'It is also significantly below the level of return proposed by Ofwat for the water and sewerage industry last month. Unlike that review, Ofgem's final proposals represent the first time that electricity distribution companies have had any firm indication of the allowed cost of capital.'
The regulator's chief executive Alistair Buchanan said: 'Our proposals are tough on inefficiency and poor service but are fair in allowing the companies to invest to replace ageing network assets and in improving the environment. The controls provide great opportunities for companies which are more efficient and excel at providing what their customers want - but they will penalise poor performers.
'We have listened to consumers' expectations of top quality service, reliability, fair prices and environmental improvement for today and for the future.'
Ofgem chairman Lord Mogg said: 'This fund breaks new ground in regulation. Its objective is to encourage companies to be more innovative with new technologies and commercial arrangements. This will allow companies to play a full part in combating climate change.'
Ofgem also decided to 'set a 4.7 per cent actual weighted average cost of capital (using a pre-tax cost of debt and a post-tax cost of equity)', which has been criticised for being 'significantly below all comparators'. Southern and Scottish Energy said: 'Moreover, these were all set before the reassessment of risk and the cost and availability of finance that has characterised global financial markets in the last 18 months.
'It is also significantly below the level of return proposed by Ofwat for the water and sewerage industry last month. Unlike that review, Ofgem's final proposals represent the first time that electricity distribution companies have had any firm indication of the allowed cost of capital.'
The regulator's chief executive Alistair Buchanan said: 'Our proposals are tough on inefficiency and poor service but are fair in allowing the companies to invest to replace ageing network assets and in improving the environment. The controls provide great opportunities for companies which are more efficient and excel at providing what their customers want - but they will penalise poor performers.
'We have listened to consumers' expectations of top quality service, reliability, fair prices and environmental improvement for today and for the future.'
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