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British households could have saved £800m on their energy bills over eight years if electricity network companies had been regulated with more “up-to-date” information, according to the National Audit Office.
The public spending watchdog has attacked the level of returns that Britain’s energy regulator, Ofgem, has allowed the country’s electricity network companies to give to their shareholders since the middle of last decade. The NAO said these returns have come at the expense of consumers.
Households and businesses pay for the running and upgrade of electricity networks via their energy bills, with the costs typically making up about 20 per cent, or £130, each year. But in recent years these figures have come under scrutiny from consumer campaigners and opposition MPs, who have criticised the level of profits made by network companies, such as National Grid, SSE, Iberdrola of Spain and UK Power Networks.
In a report published on Thursday, the NAO said the cost to British consumers of managing the electricity grid “has been greater than it should have been” in recent years. The NAO said this was partly because Ofgem did not take into account the latest information it had on the risks network companies were likely to bear compared to those in other sectors.
Ofgem assesses network companies’ business plans over a set “price control” period — the most recent of which will last eight years — and calculates a baseline rate of return for investors which is intended to reflect the levels of risk they assume.
The NAO said electricity network companies expect to make an inflation-adjusted return of 9 per cent on average to shareholders during the current price period. This ends in March 2021 for National Grid, SSE and Iberdrola, which own high-voltage transmission networks in Britain, and in March 2023 for businesses such as UK Power Networks and Northern Powergrid, which own local infrastructure that carries electricity from the main grid to homes and businesses.
This compares to an estimated return of 5-6 per cent that shareholders would make if they invested in FTSE all-share companies, according to the watchdog.
“We estimate that if Ofgem had placed greater weight on this [up-to-date] evidence, consumers could have paid at least £800m less,” said the NAO report.
Networks’ returns have also been boosted by rewards for hitting performance targets, but the NAO said these were set by Ofgem “too far in advance” and network companies were exceeding them before the regulatory period had even begun.
The criticism comes at a sensitive time for network companies, which are tussling with Ofgem over the returns they should be allowed to make from 2021 and 2023, when the next regulatory periods begin.
Ofgem has vowed to crack down on returns after the consumer charity Citizens Advice warned in 2017 that network companies were making “eye-watering” profits.
Outgoing Labour leader Jeremy Corbyn pledged to renationalise energy networks in the run-up to December’s general election, claiming they had been “overcharging customers to the order of billions of pounds” since privatisation in 1990.
Akshay Kaul, Ofgem’s director of network price controls, acknowledged costs to consumers “have turned out to be higher than they needed to be”.
“That’s why our tough new round of price controls will lower returns to save consumers money, whilst pushing companies to go further on decarbonisation and ensuring we retain one of the world’s most reliable energy systems,” Mr Kaul said.
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