ENERGY regulator Ofgem has proposed almost doubling investment in Britain's electricity and gas transmission networks to a maximum of pounds 5bn for the five years to 2012, but analysts said the suggested rate of return was too low.

The investment is needed to ensure renewable energy and gas import projects currently being developed can be connected to the national transmission networks. Ofgem chief executive Alistair Buchanan said: "Britain's energy networks face huge challenges over the next five years to respond to changes in the sources of our gas and power.''

Britain's transmission networks, which pump gas and electricity around the country, are run by the National Grid and subsidiaries of Scottish Power, and Scottish & Southern Energy.

Ofgem has initially proposed that pounds 4.25bn be invested in the transmission networks from 2007 to 2012. An extra pounds 750m has been allocated in case additional gas or renewable energy projects need to be connected to the networks.

The amount proposed is less than the companies' initial submission of pounds 6.7bn. Ofgem's proposed investment is based on there being fewer electricity and gas projects that will need connecting to the transmission networks. The regulator also believes there is scope for cost savings in the proposed investments.

Companies have an incentive to propose higher levels of investment as the regulator sets a fixed rate of return. So more investment automatically means more returns. However, Ofgem's proposed rate of return of 4.2pc is lower than the 4.8pc on the electricity distribution assets, the local wires which bring power into homes and offices. Water companies have a fixed return on their assets of 5.1pc.

Charles Stanley analyst Clive Roberts described Ofgem's proposed rate of return as "a tough stance''. In such negotiations the regulator often "plays hard ball initially'' before negotiating "a slight softening of their position'', he said.

The companies will hold negotiations with Ofgem over the coming months with the final proposals scheduled to be released in November.

JP Morgan analyst Ian Mitchell described the proposed return as "disappointing'' for National Grid. If Ofgem's proposals were accepted next year's earnings would come off by around 4pc, which Mr Mitchell said would be "no disaster''.

A Scottish Power spokesman said the proposals showed "no real surprises''.

National Grid shares fell 3 to 596p, Scottish Power came off 7 to 576p and Scottish & Southern Energy closed down 13p at pounds 11.16p.