Energy firms warned to expect tougher price controls

Firms running the UK’s energy network infrastructure have been warned to expect tougher price controls from 2021.

UK energy regulator Ofgem says there is evidence investment costs have been lower than expected and company performance “towards the higher end of expectations”.

Ofgem says it needs to strike a balance between encouraging global investment – with more than a million kilometres of pipes and wires to replace across the nation – and making sure consumers get a fair deal.

But it warns energy transmission firms and their shareholders should be prepared to accept lower returns for trading within the UK’s stable regulatory environment.

Not publicly listed

Many of the UK’s network operators are subsidiaries of bigger conglomerates, and not publicly listed. One of the UK’s biggest operators, UK Power Networks – which supplies electricity to London and the South-East – is owned by three Hong Kong-based companies.

The Ofgem warning came on the same day that consumer group Citizens Advice published research showing the energy consumers were subsidising energy network companies’ profits to the tune of £7.5bn over an eight-year period.

Citizens Advice claims Ofgem made three basic errors:

• Overestimating the business risk for investors – cost £3bn
• Assuming interest rates would be higher than they were – cost £3.4bn
• Financial incentives to reward efficiency by suppliers had encouraged companies to inflate costs – cost £1.1bn

'Multi-billion pound windfall'

Citizens Advice chief executive Gillian Guy said: “Energy network firms are enjoying a multi-billion pound windfall at the expense of consumers.

“Decisions made by Ofgem have allowed gas and electricity network companies to make sky-high profits that we’ve found are not justified by their performance.

“Through their energy bills, it is consumers who have to pay the £7.5bn price for the regulator’s errors of judgment. We think it is right that energy network companies return this money to consumers through a rebate.

“If energy network companies fail to return these unjustified profits to the consumers that paid for them then the government should consider stepping in.”

'Learning lessons'

Ofgem’s senior partner for networks, Jonathan Brearley, said: “Ofgem is working to ensure that customers pay no more than they need to for energy networks while still benefiting from improvements in reliability and service.

"That is why in launching the new round of price controls, we are looking at what lessons we can learn to improve further the RIIO framework for consumers.

“Our stable regulatory regime appeals to investors. We believe current market evidence suggests they may be willing to accept lower returns for regulated assets.

"Setting tougher controls will ensure that Britain’s energy networks deliver even better value for customers.”