An independent review into UK energy costs has slammed “financial engineering” by the network distribution companies for pushing up electricity prices.
The report said transmission and distribution costs made up 28% of the typical household bill in 2016 and called for National Grid to be renationalised.
Oxford university professor Dieter Helm, who carried out the review at the request of the government, said energy policy was complex and expensive, and not fit for purpose.
He said early price-control regulation had proved weak and had “facilitated significant financial engineering on the part of the companies” and encouraged “a wave of takeovers”.
Mr Helm said when privatisation took place in 1990 it was never envisaged that company balance sheets would be used to arbitrage the cost of equity and debt, and that a principal source of profit for the companies would come from financial engineering and falling interest rates.
Companies have changed hands
“Some 25 years after privatisation, almost all the distribution companies have changed hands, sometimes many times, and the electricity grid merged with the gas transmission network to form National Grid,” he said.
“They all geared up their balance sheets, and most practically exhausted them.
“The cost of energy going forward is therefore going to be driven back towards pay-as-you-go, unless they are forced to repair the balance sheets through equity injections. The money has been taken out in dividends, special dividends and share buy-backs. Putting some of it back would be a painful experience for some.”
Mr Helm said the eight-year review process by regulator Ofgem had allowed the financial engineering to happen, and urged it to be scrapped. “In practice, it has positively encouraged it,” he said.
Regulation ‘not fit for purpose’
“Regulators have played catch-up in response to what has happened. Current regulatory approaches are not fit for purpose for the existing activities, and they are inadequate for the challenges ahead of digitalisation and the emerging impacts on the energy sector.”
He said National Grid should be stripped of its role as operator of the supply network, and that it should be run by an independent public sector body, controlling a tier of publicly-owned regional operators.
The government said it would be seeking the views of industry, businesses, academics and consumer groups on Professor Helm’s review.
Business and Energy Secretary Greg Clark said: “Homes and business depend upon reliable, affordable power and the government is ambitious in its plans to keep costs as low as possible for them over the coming decades.
“We are already taking significant steps to upgrade our energy infrastructure as part of the Industrial Strategy and have published draft legislation to cap poor value energy tariffs helping millions of consumers across Britain.”