Ofgem errors have led to higher network profits than necessary

While networks have provided a good service in Britain, mistakes from Ofgem have seen consumers pay more than they should have under RIIO-1, the National Audit Office (NAO) has said.

On 30 January, it published a report, stating that on average, 20% (£13) of the typical household’s annual electricity bill has gone towards running, maintaining and upgrading the networks. Consumers in Britain have also faced fewer power cuts than those in most other EU countries. Networks have also met almost all of their RIIO-1 targets. However, networks expect to deliver shareholder returns of 9% in real terms, with the UK company average being 5-6%. This is higher than Ofgem has anticipated and led to an increase in consumer costs.

Performance targets have been set too low and cost budgets too high, while Ofgem has overestimated how much many shareholders would need to incentivise them to invest in network companies. According to the NAO, had Ofgem placed greater weigh on the most up-to-date evidence on network company risk, consumers would have paid at least £800mn less in total. Furthermore, the NAO said setting price controls for eight years rather than five has locked consumers into paying higher costs for longer and delayed the chance for improvements.

The report found that, moving forwards, stronger price controls and greater coordination across the energy system are needed to ensure that networks transform to support a low-carbon energy system at low cost to consumers. It also called for Ofgem to do more work to show, in clear and simple terms, that network regulation is working for consumers.