National Grid commissioned NERA Economic Consulting (NERA) to consider the evidence for the total market return (TMR) for determining the cost of equity at RIIO-2.

In this report, NERA experts Dr. Richard Hern, James Grayburn and Zuzana Janeckova set out up-to-date estimates of the TMR based on long run historical averages, as well as forward looking evidence based on dividend discount models (DDM). We also respond to recent publications on this topic, including comments in Ofgem’s recent RIIO-2 Open letter, and a report by PwC, commissioned by Ofwat, which considered the cost of equity for water companies for PR19 (2020–2025). 

Overall, we find that estimates of the TMR have not declined relative to previous price controls, in contrast to Ofgem’s and Ofwat’s recent statements indicating a lower cost of equity at the forthcoming energy and water price controls.