Britain’s energy watchdog has warned gas and electricity networks to expect tougher price controls amid claims they are exploiting consumers to enjoy £7.5 billion in “unjustified” profits.
Ofgem has told energy network companies to brace themselves for a tougher regime from 2021 and said investors in these firms must prepare for lower returns as it pledged to deliver “even better value for customers”.
Its warning shot comes as a separate report from Citizens Advice on Wednesday accused Ofgem of allowing networks to make billions in returns on their capital investments at the expense of households.
The charity wants energy network companies to return the money to consumers in the form of a rebate through lower bills.
Consumers pay for energy networks through gas and electricity bills and Ofgem is responsible for restricting this amount, which it does partly by forecasting the cost of building and maintaining energy networks while estimating the level of business risk for investors.
Energy networks – such as National Grid – are monopolies and so Ofgem sets limits on the maximum amount these firms can recover to fund the operation and investment in their networks over an eight-year period.
Citizens Advice said Ofgem had made errors in judgment by being too generous towards network companies.
Ofgem admitted network company performance has been “towards the higher end of expectations” over the past four years as it outlined plans for its new tougher regime in an open letter to the sector.
It said: “Ofgem believes there is strong evidence that investors are increasingly willing to accept lower returns for investing in the very stable regulatory framework that Britain offers.
“Ofgem is signalling today that companies need to prepare themselves for a tougher round of price controls from 2021.”
Jonathan Brearley, senior partner of networks at Ofgem, said the plans are designed to ensure households and businesses “pay no more than they need to” for energy networks.
Ofgem said the regime needs to evolve to meet the changing energy sector, with renewables now accounting for nearly a quarter of capacity, while networks are also able to attract investment at a cheaper cost.
It is also consulting on changes, such as making the regulatory period shorter than the current eight years.
In its damning report, Citizens Advice claimed Ofgem forecasts that network companies will currently earn an average of 10% return for their investors, which is an average 19% profit margin – compared with the 4% margin made by the largest energy suppliers.
Citizens Advice chief executive Gillian Guy said: “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 £7.5 billion 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.”