Ofgem urges National Grid to rein in costs

The regulator's report also shows that the Big Six would have lost money last year if all customers had been on fixed-price tariffs

Ofgem has urged National Grid to rein in the costs of balancing the electricity system in its first State of the Market report.

The publication, which is designed to be the first of an annual series of snapshots, also shows that the Big Six suppliers would have lost money last year if all customers had been on their fixed-price tariffs.

The State of the Market report, published today, shows that the grid’s balancing costs rose last year by £250 million to £1.15 billion.

According to Ofgem’s report, available generating capacity was between 1-2GW higher than forecast.

It says the rise is largely due to “one-off factors”, but partly reflects the challenges of balancing a system with increasingly inflexible generation sources.

Rob Perkins, chief economist at Ofgem, told the report’s launch that the regulator hoped that the capacity market would “mitigate some of these costs”.

“We are paying more than necessary to maintain security of supply. I don’t want to suggest we should let the lights go out but we should be thinking of value for money for consumers when considering how to approach the issues here.”

“Consumers are paying for more capacity than we need given that the grid costs of the capacity market are £1 billion per year. This is something we will be monitoring closely.”

The report also includes an analysis of the Big Six suppliers’ profits, which it says were £1 billion in 2016 before tax and interest, equating to 4.5 per cent of turnover. However, all of these profits were made on gas supply with electricity recording an overall loss.

And the regulator estimates that if standard variable tariff prices were reduced to provide the same gross profit margin as fixed tariffs, suppliers would have made a 6 per cent loss overall, unless suppliers significantly reduced their operating costs.

While the six largest suppliers made £54 of profit on each dual fuel customer in 2016, the mismatch between average prices for typical SVT and fixed tariff consumers was £180 per annum.

While the overall level of profits has fallen from a peak of £1.2 billion in 2012, margins have been “relatively stable”, according to Ofgem.

Perkins also told the launch event that progress on decarbonising has slowed “quite substantially”, pointing to figures showing that emissions from heating building are higher in 2016 than in 2014.

“Further action is necessary,” he said.

The annual State of the Market publication is a response to a recommendation in the Competition and Markets Authority energy market report last year.