Citizens Advice believes £7.5bn in “unjustified” profits should be returned to consumers who pay for network costs via their electricity and gas bills, although its figures have been contested by the energy industry and regulator.
Ownership of electricity and gas networks came under the spotlight in the run-up to June’s general election, after the Labour party said in its manifesto it would bring both national and regional grid infrastructure to back into public ownership over time.
Electricity sector privatisation began in 1990 and the gas industry was privatised in 1986. Energy network companies — which own and operate the cables and wires that help deliver electricity and gas to homes and businesses — are in effect monopolies that are regulated by Ofgem. Ofgem evaluates what their costs, including the cost of capital to finance investments, might be over an eight-year “price control” period. Citizens Advice claims many of the regulator’s calculations for the most recent price control went “considerably in networks’ financial favour”.
It believes assumptions Ofgem made about factors such as the future path of interest rates and returns on government bonds were too generous, as was the regulator’s assessment of the risk associated with operating a network company.
These “generous” assumptions will lead to network companies making average profit margins of 19 per cent and an average return of 10 per cent for their investors at the expense of consumers, Citizens Advice claims in a report published on Wednesday, which recommends a shorter price control period to allow for more accurate forecasting.
“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,” said Gillian Guy, chief executive of Citizens Advice. Ofgem defended its regulatory regime, saying it helped to cut costs, improve reliability and customer satisfaction.
“Ofgem has already cut costs to consumers by 6 per cent in the current price control and secured a rebate of over £4.5bn from network companies and is engaging with the industry to deliver further savings,” said Dermot Nolan, chief executive of the energy regulator.
Mr Nolan insisted the next price controls would be “tougher for investors”. The current price controls for the gas and electricity transmission networks, plus gas distribution, run until 2021 and until 2023 for local electricity distribution networks.
“While we don’t agree with its modelling and the figures it has produced, the Citizens Advice report raises some important issues about network regulation which will be addressed in the next control,” Mr Nolan said.
The Energy Networks Association, a trade body, refuted the claims of Citizens Advice, insisting that costs had fallen by 17 per cent in real terms since privatisation. The current regulatory framework was established after a public consultation, it said, adding that today’s report repeated several old claims that had previously been rejected by the Competition and Markets Authority.
“Our energy networks are among the most reliable and lowest cost in the world and their performance has never been better. In the next six years energy network companies are forecasted to deliver £45bn of investment in the UK economy,” a spokesman for the networks association added. National Grid said that since 2013 it had generated savings of £460m for bill payers.
“National Grid makes up just 3-5 per cent of the average bill, which pays for the transmission networks that transport energy across the country and our ability to balance the system second-by second. But even though it is only a small proportion we are always looking for new ways to reduce costs further,” it said.