Ofgem on Thursday paved the way for the first shake-up of gas and electricity transmission and distribution for 20 years by launching a two-year review of the regulatory regime governing the energy networks.

The regulator will consider replacing the “RPI minus” system, which gives incentives to the owners of energy networks to keep costs below the rate of inflation, with one that will encourage more investment.

Alistair Buchanan, Ofgem’s chief executive, said the review should not be taken as criticism of the achievements notched up by the existing regime.

“The current RPI minus X regime has delivered much greater efficiency from the network operators with better quality of service, improved reliability and lower costs to consumers. But we need to know that the regime can continue to promote innovation from the companies at the level that is required for the future,” he said.

The regulatory regime was introduced in the late 1980s, after privatisation of the energy industry.

One industry executive said on Thursday it had been “very successful” in making the former state-owned businesses more efficient. “But if you have such a regime in place for 20 years it becomes harder to reduce operational expenditure and capital expenditure.”

Steve Smith, managing director of Ofgem’s networks division, said there were still cost savings to be made in the UK’s gas networks, but in electricity “most of the operational efficiencies post-privatisation have now been realised, the lemon has been squeezed dry”.

Mr Smith added that the government’s targets for expanding renewable energy “may require our energy companies to do things they haven’t had to do for 20 years”, and make significant investments in the networks in order to connect up new power generation projects.

“Companies want a simpler set of incentives and a clearer idea of what they are supposed to do.”

The cost of energy transmission and distribution contributes a relatively small part to customers’ energy bills compared with the cost of fuel.

But as investment in networks went up, there was “no doubt” that the cost to consumers would rise, said an energy consultant. “The interesting question will be the rate of return allowed for the companies,” he said.

Energy companies including National Grid, which owns the gas and electricity transmission networks in England and Wales, welcomed the review, which is not expected to lead to regulatory changes until 2015.