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Ofgem could save consumers a further £1.7 billion in next network price control

11 Medi 2020

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. 

Ofgem can go further

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.”

Notes to editors

  1. “The current price control” refers to RIIO-1, ending this year for Gas Distribution and Transmission.
  2. £1.7 billion figure taken from Citizens Advice response to Ofgem consultation on RIIO-2 Draft Determinations (full executive summary available on request.
  3. £7.5 billion taken from Citizens Advice report Missing Billions (2017)
  4. Citizens Advice includes the national charity; the network of independent local Citizens Advice charities across England and Wales; the Citizens Advice consumer service; and the Witness Service.
  5. Citizens Advice is the statutory consumer advocate for energy and post. We provide supplier performance information to consumers and policy analysis to decision makers.
  6. The Citizens Advice Witness Service provides free, independent support for prosecution and defence witnesses in every criminal court in England and Wales.
  7. Citizens Advice offers Pension Wise services at 500 locations in England and Wales.
  8. Citizens Advice’s services are free, independent, confidential and impartial, and available to all regardless of race, gender, disability, sexual orientation, religion, age or nationality.
  9. To get advice online or find your local Citizens Advice, visit citizensadvice.org.uk
  10. For consumer advice, call the Citizens Advice consumer service on 0808 223 1133 or 0808 223 1144 to talk in Welsh.
  11. We helped 2.6 million people face to face, by phone, email and webchat in 2017-18. For service statistics see our monthly publication Advice trends.
  12. Citizens Advice staff are supported by over 23,000 trained volunteers, working at over 2,500 locations in England and Wales.