Ofgem allowing ‘huge’ network profits

Citizens Advice urges Ofgem to seize opportunity to wipe £1bn off UK energy bills

UK customers are “overpaying” for their energy supply while energy networks make excessive profits, Citizens Advice has said.

Responding to the publication of annual reports on energy network performance today, the consumer charity criticised the level at which the energy regulator Ofgem set the cost of equity for networks.

Citizens Advice claims an overly “generous” cost of equity is inappropriately rewarding network companies – which are “too big to fail” – for delivering low risk, business as usual activities.

In today’s RIIO annual reports, Ofgem confirmed that energy networks are generally making profits of around 10 per cent. Citizens Advice said this is a “huge” amount for regulated, monopoly businesses.

In a blog, Citizens Advice’s senior policy research Morgan Wild stated: “Ofgem has been too generous in setting the cost of equity, particularly in assuming that networks are far riskier investments than they are.

“This leads to billions in increased costs. Ofgem should reduce the cost of equity to match actual market conditions.”

According to analysis carried out by Citizens Advice: “Tiny adjustments to the cost of equity can mean hundreds of millions of pounds in difference to the amount consumers pay.”

The charity estimated that a 0.1 per cent reduction in the cost of equity would reduce consumers’ total networks’ bill by around £190 million over the course of the price controls. It urged Ofgem to take the opportunity to deliver this saving to customers in the next price control.

Ofgem responded to Citizens Advice with a statement which said it is “determined” to ensure customer get the best deal from energy networks “in terms of service and value for money.”

The regulator added that network companies “are only half way through their price controls so the returns they report are still forecasts. The action we have taken in our mid-period review of transmission price controls will reduce returns for National Grid, especially in gas transmission.” 

It also pointed out that: “If companies underspend their allowances we require them to share the benefits with customers.”

Ofgem did allow, however, that it has “lessons for us to learn” from the way its first RIIO price controls are playing out.

“We will make sure these are fully reflected in the next price controls (for gas distribution and energy transmission) from 2021, so we continue to drive value for consumers.”

Last month Ofgem chief executive Dermot Nolan flagged that the regulator will reconsider the use of an eight-year price control as part of its preparations for RIIO 2.

He also said: “When you set up a new regulatory framework, you’re never going to get everything right.”