Plan would hit gas and electricity networks’ returns and save £5bn for consumers, says watchdog
Ofgem has signalled tougher price controls for energy firms that could knock up to £25 a year off the average household gas and electricity bill.
Under the proposed new rules, due to come into force in April 2021, companies that run Britain’s gas and electricity networks would face a “significantly lower range of returns”, the regulator said.
The changes would deliver savings of over £5bn to consumers over five years, Ofgem said. That is the equivalent of about £15 to £25 per year off a dual fuel household bill.
Network costs are included in household bills and currently account for about £250 of a typical annual dual fuel bill of around £1,100. Ofgem has the power to limit the returns network companies such as National Grid and Scottish Power can get from the investments they make in the grid.
“The energy sector is rapidly changing and consumers must be confident they continue to get good value for money for the services the networks deliver,” said Jonathan Brearley, Ofgem’s senior partner for networks.
“Ofgem’s stable regulatory regime allows companies to attract investment from around the world on behalf of consumers in 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.”
The regulator said its “tougher approach” would include a cost of equity range – the amount network companies pay their shareholders – of between 3% and 5%. That is the lowest rate ever proposed for energy network price controls in Britain, and below the current rate of 6-7%.
Citizens Advice said the plans were a “major step forward” for Ofgem, adding it must follow through with action.
“These proposals should prevent a repeat of the billions in excess profits energy network companies are making under the current price controls,” said the chief executive of the consumer charity, Gillian Guy. “This means better value for consumers and potentially lower bills.
“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.”
National Grid, in response to Ofgem’s proposals, said it would continue to work constructively with the regulator over the next three years, to achieve the “best outcomes for all stakeholders”.
It added: “We note the wide range of options the consultation document contains and acknowledge the focus on long-term thinking for critical infrastructure, incentive outperformance opportunities for well-run companies and the continuing alignment of consumer and shareholder interests.”
Energy network companies have invested around £100bn in the national and local grids since 1990, and power cuts have almost halved since 2001.
Ofgem said that, under its existing price controls, the cost of transporting a unit of electricity around Britain has fallen by 17% since the mid-1990s.
Firms have until 2 May to respond to Ofgem’s proposals