Electricity customers risk paying extra £1.5bn to maintain pylons

HOUSEHOLDS are at risk of being overcharged by £1.5bn in a plan to maintain the nation’s electricity network, the industry regulator has been warned.

Customers will pay more than is needed to maintain electricity pylons and cables under a funding formula put forward by Ofgem, according to evidence submitted by Citizens Advice.

The consumer group said Ofgem’s payment assessments “favour the network companies”, just as families’ energy bills are poised to soar by 80pc to £3,549 in October under the new price cap.

Ofgem announced earlier this year that it would hand electricity networks an annual return of 4.75pc on their investment between 2023 and 2028, through a charge added to consumers’ bills.

This is a reduction from a previous rate of around 6.8pc. Ofgem has said its plans will allow for upgrades to the system worth around £21bn.

But Citizens Advice has said the settlement is still too generous and that the companies are being “unduly rewarded”. The payouts are set to rise with inflation.

UK Power Networks is the largest player in the industry, and is owned by the Hong Kong billionaire Sir Ka-shing Li. The company is responsible for providing electricity to 8.3m homes in the South East and across East Anglia. Other major operators include Western Power Distribution, Northern Powergrid and Scottish and Southern Energy.

In a response to Ofgem’s consultation on the proposals, Citizens Advice said: “The overall approach to cost of equity over-estimates the level of returns required and detailed decisions favour the network companies.

“There are multiple occasions where incentive targets favour the network companies with outperformance and rewards too easy to achieve. Ofgem should review incentive mechanisms to ensure that they are appropriately calibrated

to ensure that deteriorating or poor performance is penalised.”

James Daley, managing director at consumer group Fairer Finance, said: “Energy firms should be doing everything they can to keep costs low. We can see that rising energy prices are already having a catastrophic effect on the economy, on households and on businesses. Anyone who has a long-term interest in the British economy doesn’t want to see this crisis drag on longer than necessary.”

Ofgem is preparing to publish its final decision on the settlement in December. But energy market sources said the regulator will almost certainly face legal action by network operators in January.

Lobbyists for the operators will launch negotiations with regulators over its plans in the coming months. The Energy Networks Association is expected to argue that operators need to be able to attract investment so they can deliver the infrastructure needed to connect more heat pumps and electric vehicles to the electricity grid.

One source said: “There is a long tradition of the final determination being very similar to the draft determination. They usually keep a few things back in the bag and the companies work extremely hard to prove that the regulator has been mean to the point of being wrong and get some concessions.”

A spokesman for Ofgem said: “We will consider all the evidence provided by stakeholders, including from Citizens Advice, in relation to the level of returns that can be paid to investors, before confirming our final decisions later this year.”