British Gas has notched up pressure on DNOs

Electricity distribution network operators (DNOs) should be nervous. While their network peers in transmission and gas distribution are safely into their first year of the RIIO price settlement, DNOs face the nail-biting wait for Ofgem’s draft determination in July. MPs are lining up an inquiry into network costs and DNOs look like the readiest target to press for price cuts. Now British Gas has weighed in to helpfully suggest slashing £500 million a year from their revenue allowances.

It is a case of unfortunate timing. The pressure on energy bills has intensified since Ofgem set prices for the other networks. Energy suppliers are taking a lot of flak for rising energy prices and are happy to point out the contribution network costs make – an estimated 23 per cent of the typical dual fuel bill. Now it is the DNOs turn to undergo the RIIO process, they must convince not only the regulator but politicians their business plans give good value for money.

National Grid, which owns every type of energy network but electricity distribution, on Thursday revealed an impressive return on equity of between 12.4 per cent and 13 per cent for its UK regulated businesses – significantly higher than the 10 per cent assumed by Ofgem. While the company proudly announced it was returning £70 million of efficiency savings to customers, it did not escape the Telegraph’s notice shareholders get £100 million.

We could debate whether the results reflect exceptional efficiency and innovation from National Grid or an overly generous allowance from a toothless regulator, but it would be largely academic. National Grid’s prices are set out to 2021 and it would take exceptional circumstances to revisit them. The process is designed that way to forestall the risk of political intervention and give companies the stability to finance and run efficiently. Government meddles at its peril.

That is why an Energy and Climate Change Select Committee inquiry into network costs is likely to home in on the one sub-sector still open to influence: electricity distribution. The cross-party group of MPs is due to hold hearings before the summer recess, although a packed schedule could see it pushed back to autumn. Meanwhile, a published list of written evidence submissions gives a taste of what is to come.

The most aggressive submission came from British Gas, which opted out of Energy UK’s strictly factual offering to criticise “overly generous” regulatory allowances and a “lack of transparency” on network costs. The supplier went further and suggested ways Ofgem could (and in British Gas’s view, should) get tough on the DNOs and save households £96 by 2023. These ranged from a one-off crackdown on alleged double charging for certain connection services to a further squeeze on the (already reduced) cost of equity allowance.

Network industry figures have privately grumbled British Gas’s numbers are unsubstantiated, but not come forward with any detailed rebuttal. In any case, the analysis puts DNOs and Ofgem on the defensive.

Not all stakeholders are fixated on cutting costs, however, and the renewables lobby raised the opposite concern: that prioritising short-term savings could hit investment in the infrastructure needed to support low carbon technologies. An incremental approach to network upgrades could cost more in the long run and hinder connections of wind turbines and solar panels, Renewable UK argued. The six DNOs have all planned their investments around low expectations for the take-up of low carbon technologies.

However the arguments may pan out in Parliament, British Gas has given MPs ammunition for some tough questioning. DNOs had better be ready.