UK energy regulator to limit profits at electricity distributors

The companies that own the UK’s local electricity distribution networks are facing big cuts to the profits they are allowed to make after the country’s energy regulator told them to invest more in maintenance and improvements.

Ofgem on Wednesday published plans to cut baseline annual rates of return to 4.75 per cent for the five years from April 2023, down from about 6.8 per cent under the current regime.

The regulator said the proposal would enable £20.9bn to be spent on maintenance and measures to boost resilience, such as the replacement of wooden poles, while keeping charges to customers stable at about £100 per year.

The move would hit six monopolies including ScottishPower, Northern Powergrid and UK Power Networks which own the local distribution networks that transport electricity from the high voltage national transmission grid to homes and businesses.

The proposals are expected to be contested, with a final decision projected by the regulator by the end of the year.

Jonathan Brearley, chief executive of Ofgem, said: “Ofgem’s job is to ensure energy networks have achievable and affordable plans that will attract the investment needed for a more resilient energy network and achieve the government’s net zero ambition at the least cost to the consumer.”

Ofgem, which is already under pressure for its handling of the energy crisis, decides how much the networks can charge customers because they provide an essential service with no competition in the areas in which they operate. All their revenues and any investment in their networks, including electricity pylons and other infrastructure, are funded by customer bills.

While the regulator has to balance the need for investment in the network with protecting consumers from unsustainable price rises, the electricity networks argue that they need to be able to pay for investment in infrastructure to cope with the transition to renewables.

The Energy Networks Association, which represents the operators, said the settlement would “need more work” to deliver the transition to net zero.

The energy networks are also under pressure following critical reports of their handling of Storm Arwen, which left tens of thousands of people without power for as long as 10 days in December.

An investigation by Ofgem found that nearly three quarters of the damaged poles were more than 40 years old, suggesting a lack of investment in the network had contributed to the problems.

The regulator is keen to ensure that the companies become more efficient rather than raising consumer bills.

Average household bills are expected to increase by £800 in October to £2,800, meaning they will have risen 119 per cent in a year. The cost of the electricity and gas transmission and distribution networks accounts for about a fifth of customer bills.

Public pressure on the networks has been growing after Citizens Advice produced a report in 2017 claiming network companies were making “eye-watering” profits at the expense of British households.

Gillian Cooper, head of energy policy for Citizens Advice, said Ofgem was “right to challenge networks to operate as efficiently as possible”.

“Networks have been allowed to make excessive profits for too long and they’re still able to make too much. Ofgem must continue to tackle this by limiting their returns even further,” she added.