Energy networks making big profits at expense of consumers, says watchdog
The regulator has allowed energy network companies to make bigger than expected profits at the expense of household bills, according to its own state of the market report.
Ofgem admitted the companies that run Britain’s energy pipes and wires had earned double-digit returns in the last year despite its efforts to keep a lid on energy bills.
The regulator oversees the business plans of regional gas and electricity networks to keep a rein on how much each firms can spend on their infrastructure, and how much they can claim back through energy bills.
It said that with hindsight it had set the rate of return too high, and that some companies had managed to spend less than planned, to rake in higher profits.
The uncomfortable evaluation has emerged following Ofgem’s decision to appoint its head of networks as its new chief executive. Jonathan Brearley will replace Dermot Nolan when he steps down in February next year.
It said: “The overall costs to consumers of the transmission and distribution networks have turned out to be higher than they needed to be.”
The admission is likely to anger critics of the companies, including UK Power Networks and National Grid, who have warned that networks are hiking up household energy bills while paying bumper shareholder payouts to foreign investors.
It could also embolden the Labour party’s nationalisation agenda which includes a pledge to bring the networks back under public control to end “ripoff” energy bills.
Dr Alan Whitehead, the shadow minister for energy and climate change, said: “When it comes to the excess profits of network companies, Ofgem were asleep at the wheel. Their payment framework forces them to try and predict the future, years in advance, which was easily gamed and exploited by some network companies. Labour would scrap this senseless system by bringing energy networks back into public ownership to be run democratically, for the public good, and without ripping off bill payers.”
David Smith, the chief executive of the Energy Networks Association, said the cost of Britain’s energy pipes and wires “are almost a fifth lower than they were at the time of privatisation in 1990” – and would fall further.
He said: “The energy networks have delivered for the bill payer while playing an integral role in the move to a lowcarbon economy. The way we deliver energy has never been more reliable, backed by record levels of investment.”
However, the regulator’s renewed concern over network company profits has emerged as the companies face scrutiny over their role in the August blackouts which left 1m homes without electricity, including a hospital and Newcastle airport.
Some networks managed to earn a 10% return on their investment, compared with falling profit margins of only 3% for the UK’s largest energy suppliers which are losing customers to a new crop of upstart energy suppliers.
Ofgem said its decision to encourage more players into the market had helped to increase competition and switching rates. But it admitted this strategy had led to a five-fold increase in the number of customer complaints to the energy ombudsman because many small suppliers are not financially stable enough to provide adequate service.
The ombudsman accepted more than 100 complaints for every 100,000 customers of small suppliers in the first quarter of this year, compared with about 20 cases in the first quarter of 2017.
The regulator said a fifth of consumers switched supplier in the last year while the proportion of homes which have never switched more than once has fallen from more than 60% to less than 50%.