Ofgem could save energy consumers a further £1.7 billion during the next set of energy network price controls (RIIO-2), according to new analysis by Citizens Advice.
In 2017, research by Citizens Advice found that energy networks would make up to £7.5 billion in unjustified profits over the course of the current price control [see notes to editors] due to errors by the regulator.
The charity found the mechanism through which Ofgem set how much money these monopolies can make was far too generous to the network companies. This allowed the companies to make billions in additional profits.
Under its current recommendations for the next price control (known as RIIO-2), Ofgem has cut the proposed returns of energy networks by half, saving consumers £3.3bn for the gas and transmission sectors alone.
Citizens Advice, in its response to Ofgem’s consultation on RIIO-2 Draft Determinations, says the regulator has still been too generous to the networks (the companies responsible for the ‘pipes and wires’ infrastructure for gas and electricity) on the cost of capital (the returns they make on their investments).
According to the charity’s analysis, by using metrics which more accurately reflect the returns these companies would make on the open market, the regulator could go further than its current proposals.
By adopting the changes suggested by Citizens Advice, Ofgem could do more to lower the cost of capital, saving customers £1.7 billion over the course of the five-year price control.
An alternative option for Ofgem would be to claw back more from networks if they outperform the price control, as has historically been the case. When networks outperform the price control as a result of genuine efficiency this is good news for consumers, but frequently companies have outstripped the regulator’s estimates.
While the regulator is taking account of this and is looking to claw back some money, Citizens Advice believes it could go further, this option would save consumers £1.2 billion.
Dame Gillian Guy, Chief Executive of Citizens Advice, said “Nearly three years ago we set out how the previous price control had allowed energy networks to make billions in unjustified profits.”
“Ofgem has made significant progress on delivering a price control that is value for money for consumers. But right now energy networks are aggressively pushing back against the regulator’s proposals. They’ve even claimed the price control will put more people at risk of blackouts and jeopardise the net-zero transition.”
“But the only thing really at risk here are the excessive profits these companies have made by overcharging consumers. The regulator must hold its nerve in the face of the significant pressure from the networks and look at whether it can go further.”