Consumers have been paying “more than they should have” for electricity over seven years as a result of Ofgem’s price controls set for network companies.
That’s according to the National Audit Office (NAO), which found households across Britain have paid at least £800 million more because of weaker price controls set by the regulator.
Every year, around 20% – or £130 on average – of the typical household’s annual electricity bill goes towards running, maintaining and upgrading the networks, which transport electricity from power plants into homes and businesses.
The networks are privately owned and the earnings are regulated by Ofgem through price controls, which provide network operators with budgets and performance targets.
While the networks provide a “good service”, the NAO found consumers have paid “higher than necessary” costs for electricity because networks’ performance targets were set too low, their cost budgets were set too high and Ofgem overestimated how much money shareholders would need to incentivise them to invest in network companies.
It added the regulator also set a regulatory period of eight years instead of the usual five, which delayed the opportunity for improvements and locked consumers into paying higher costs for longer.
Network companies expect to deliver shareholder returns of 9% in real terms, compared to a UK company average of around 5% to 6%.
The report estimates if Ofgem had “placed greater weight on the most up-to-date evidence” on network company risk, consumers could have paid at least £800 million less in total.
NAO Head Gareth Davies said: “Ofgem’s regulation of electricity networks has delivered good service performance but higher than necessary costs for consumers. Its approach to price controls used insufficiently demanding targets and the eight-year price control period meant a longer wait before these targets could be reset.
“While Ofgem has encouraged networks’ innovative efforts to reduce carbon emissions, more needs to be done across government if the UK is going to reach net zero emissions at least cost to consumers. Tougher regulation of networks is part of the picture but so is greater policy certainty and better coordination between the energy system’s many players.”
Ofgem is currently designing the next set of price controls, which will start to apply from 2021 and is making changes, which are aimed at ensuring network companies only earn a “fair return”.
These include reducing its estimate of the money shareholders require to incentivise them to invest in network companies and proposing to adjust networks’ returns if they vary greatly from its expectations.
Akshay Kaul, Ofgem’s Director of network price controls said: “We acknowledge that the overall costs to consumers to date 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.
“Under our regulation, companies must share any savings they’ve made during the price control period with consumers. So far, over £6 billion has been clawed back across all networks through reduced revenues or voluntary contributions.”