ELECTRICITY companies will invest more than £6 billion in Britain’s distribution networks over the next five years.

The 14 distribution companies that own and operate overhead power cables will be allowed to raise their charges by 1 per cent above inflation, for a year from next April. Thereafter prices will rise at the same level as inflation until 2010.

The increase next year will amount to 6p a month on the average domestic bill, Ofgem, the energy regulator, said.

Ofgem hopes that through a system of penalties and incentives firms will cut the number of power outages.

Shares in the electricity companies moved slightly higher yesterday.

David Gray, Ofgem’s managing director of networks, said the scheme would allow firms to invest in networks without imposing excessive price increases.

The networks, which distribute power from the high-voltage grid to the local suppliers, need to upgrade their lines because some are at the end of their 40-year life span. They must also invest in new cables to connect wind farms. Distribution charges make up 25 per cent of an electricity bill.

Mr Gray said power companies that provided a good service could receive an incentive of up to 3 per cent of revenue. Problem companies could be penalised by the same amount.

In terms of the scheme power companies will be allowed to invest £5.7 billion in distribution networks over the next five years, with a further £500 million on preparations for wind farms.

Ofgem said its decision to set the cost of capital at 4.8 per cent would give companies “sufficient incentive” to meet the investment target, which is 48 per cent higher than current levels. Firms have also been told to cut operating expenditure by 3 per cent a year.

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