British Regulator Proposes Leaner Networks (Update)

(Adds comment from Citizens Advice)

British energy regulator Ofgem has proposed a new regulatory framework which is expected to result in lower returns for energy network companies, saving consumers over £5bn ($7bn), it said March 7. The current gas distribution and transmission price controls run from 2013-2021 and thereafter the price controls will be for five years.

Ofgem's head of networks Jonathan Brearley said the new networks price control is anticipated to result in savings for households of around £15-£25/yr, out of the £250/yr network cost component of an average £1,100/yr annual household gas and power bill. 

Network operators can then expect to earn between 3% and 5%. "This is the lowest rate ever proposed for energy network price controls in Britain. Ofgem also proposes to refine how it sets the cost of debt so that consumers continue to benefit from the fall in interest rates," Ofgem said. 

Since 1990, network companies have invested around £100bn in the national and local grids, operating one of the most reliable networks in Europe. Power cuts have almost halved since 2001, while customer satisfaction with local networks has improved significantly. Under Ofgem price controls, the cost of transporting a unit of electricity around Britain has fallen by 17% since the mid 1990s, relative to the retail price index.   

Networks must step up their use of innovation even further to maintain high levels of reliability while enabling support for new technologies such as electric vehicles, electricity storage, and local renewable generation. They will also have to share the fruits of greater efficiency with customers. 

Brearley said that the "stable, regulatory regime allows companies to attract investment from around the world on behalf of consumers in Great Britain at the lowest cost. We will capitalise on this by getting network companies to work harder to deliver better value for consumers in the next price controls."

Stakeholders have until May 2 to respond to the proposals. Ofgem will finalise the framework for setting the next price controls in summer 2018. The companies will submit business plans by autumn 2019. Ofgem’s final view on price control allowances will be published by the end of 2020.

Some of the impetus to tighten network costs may stem from the opposition Labour party's 2017 populist election pledge to renationalise energy networks, a policy that was heavily criticised by National Grid and smaller networks. Labour failed to unseat the governing Conservatives in the June 8 2017 election, which was dominated by Brexit issues, but the latter lost their majority. Networks generally stood up well to Britain's very tight gas supply situation last week.

Citizens Advice, in its response to the consultation, said the proposals should prevent a repeat of the billions in excess profits energy network companies are making under the current price controls. It calculated that in aggregate they would make £7.5bn in unexpected profits over the period, although gas transmission and distribution companies were earning less than were forecast. “The outcome of this consultation will be the acid test for Ofgem. It’s crucial that the regulator holds its nerve and sees through these changes," it said.

It said it has called on energy companies to return the excess profits to consumers as a rebate – something which some electricity transmission and gas distribution companies, including Scottish and Southern Electricity Networks and SGN have done. To date, no electricity distribution company has provided a rebate to customers for the current price control.