Ofgem warns of tougher network price controls ahead

Energy networks should prepare for tougher price controls from 2021 to maintain good value for consumers, Ofgem has warned.

The regulator said the move was in line with other utility regulators, as it said there was clear evidence pointing towards the cost of investment required for networks being significantly lower.

Ofgem said price controls also needed to evolve to meet the “rapidly changing and uncertain needs of an energy system” where changes including renewable generation growing from 5 per cent of capacity to 24 per cent in 10 years.

“There is great deal of uncertainty about the speed and direction of change: for example, the uptake of electric vehicles and the electrification of heating could have a profound impact on the power network,” it added.

Jonathan Brearley, Senior Partner, Networks, 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 that 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.”

Consumers benefit from lower charges

There are four RIIO price controls - for gas distribution, electricity distribution, gas transmission and electricity transmission.

The current gas distribution and transmission price controls run from 2013-2021.

The electricity distribution price control is from 2015-2023.

Ofgem said company performance in the first four years of the existing price control has been towards the higher end of expectations, although consumers have benefited as efficiency gains have been shared with consumers in the form of lower charges – down 6 per cent since the start of the control.

‘Subsidising unjust profits’

Ahead of the Ofgem announcement, Citizens Advice published a report claiming consumers were subsidising £7.5bn in unjustified profits made by network operators.

The national charity has published new research claimed estimates key decisions made Ofgem are allowing energy network companies to make billions in returns on their capital investments, without reflecting how efficient they have been.

In response, Ofgem’s Chief Executive Dermot Nolan said: “Ofgem's regulation of Britain's energy networks is cutting costs, increasing reliability to record levels and improving customer satisfaction for consumers.

"We are constantly striving to ensure that customers pay no more than they need to for networks.

Ofgem has already cut costs to consumers by 6 per cent in the current price control and secured a rebate of over £4.5 billion from network companies and is engaging with the industry to deliver further savings.

> Read Ofgem's statement