Households paying too much to support UK electricity networks
Consumers have paid more than they should have to support the UK’s electricity networks, according to a new paper from the National Audit Office (NAO).
Each year around one fifth of a typical household’s annual electricity bill – £130 – goes towards the running and maintenance of the UK’s power networks, which transports electricity to homes and businesses.
The report finds that under Ofgem’s price control framework, which regulates the amount privately-owned networks can earn from their operations, consumers have been overcharged for ensuring a reliable service.
Primarily, this was because performance targets were set too low, whilst budgets were set too low.
In addition, the report says that Ofgem overestimated how much money shareholders would need to encourage them to invest in network companies.
Currently, networks expect to deliver shareholder returns of 9 per cent, compared to a UK company average of around five to six per cent, which has increased consumer costs.
The report also found that Ofgem had delivered good customer service through its regulation.
Since Ofgem introduced incentives for network companies in 2002, the amount of power cuts has fallen by 50 per cent, meaning the UK suffers fewer cuts than most EU countries.
The watchdog is currently in the process of designing a new set of price controls to replace the existing ones from 2021, in an attempt to ensure networks only earn a fair return.
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Akshay Kaul, Ofgem’s director of network price controls said: “We welcome the NAO’s findings that Ofgem’s regulation has delivered consumers a good service, increasing customer satisfaction and sharply reducing power cuts to half the European average.
“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 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 £6bn has been clawed back across all networks through reduced revenues or voluntary contributions.”
The report said that four out of the nine network operators had voluntarily returned some money to consumers.
Since privatisation in 1990, around £70bn has been invested in these firms, which make a combined £8bn in revenues a year.
The NAO also highlighted that the price controls are crucial in encouraging companies to deliver the innovation required to transform the UK’s networks to low carbon in line with its 2050 targets.
According to the Department of Business, Energy and Industrial Strategy, between £17bn and £40bn could be saved by 2050 by using sources of flexibility such as batteries.
Gareth Davies, the head of the NAO, said today: “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.”