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Energy networks “gifted” billions in profit

24 February 2017

Citizens Advice has today called for the energy regulator Ofgem to make changes to stop energy networks making huge profits due to inaccurate assessments.

Ofgem has published its evaluation of the performance of energy networks, including how much they are spending and their profits.

Ofgem makes long-term forecasts on how much it thinks pipes, wires and staffing will cost energy networks. They then settle how much money these companies can make for the same period - currently this “price control” is for a period of 8 years.

Victoria MacGregor, Director of Energy at Citizens Advice, said:

“Energy networks are being gifted huge profits that consumers have to pay for through their bills.

“Currently Ofgem overestimates how much pipes, wires and staffing will cost because they are using inaccurate forecasts - Ofgem’s own research has found that these forecasts don’t match the real costs. 

“The regulator also assumes that energy networks are riskier investments than they actually are - analysis commissioned by Ofgem suggested the risk for energy networks is closer to half that of an average business.

“As a result energy networks are making an extra £2bn over 8 years from these inaccurate assessments.

“It is important that when Ofgem sets the next long term price controls it changes how it makes its assessments. The regulator should use industry-specific indexes that track the rising and falling costs of labour and infrastructure, and look at how it can make sure it is valuing the actual business risk of these monopolies.”

Citizens Advice has welcomed Ofgem’s announcement today that it would reduce National Grid’s allowance for high pressure gas pipelines by £168.8m, which means consumers will pay £90m less through their bills. This follows National Grid’s decision that new Avonmouth pipelines were no longer needed.

Notes to editors

  1. The estimate of £2bn has been calculated using Ofgem’s Price Control Financial Models and RIIO Annual Reports. It is calculated by combining the profits from totex (total expenditure) underspend in electricity transmission and gas distribution, that followed from lower than forecast prices, with the reduction in the cost of equity that would follow re-evaluating network investment risks in gas distribution by just less than half. The figure excludes money from profits returned to consumers through lower energy bills via the price control’s sharing mechanism.
  2. Ofgem’s commissioned research suggesting that network companies have a risk half that of average companies is contained in a Smithers and Co review. Ofgem’s analysis of changing outcomes in real price effects is contained in the RIIO annual reports for gas distribution and electricity transmission (similar analysis was not undertaken for electricity distribution and gas transmission).
  3. The Citizens Advice service comprises a network of local Citizens Advice, all of which are independent charities, the Citizens Advice consumer service and national charity Citizens Advice. Together we help people resolve their money, legal and other problems by providing information and advice and by influencing policymakers. For more see the Citizens Advice website.
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