Ofgem offer partial compromise on energy bill rebate demand

13 July 2017   By Samantha Smith

OFGEM have announced they plan to impose "tougher" price controls on energy distribution networks, clearing the way for energy customers to receive better value for money.

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Credit: chrisdorney/Shutterstock.com

Their announcement comes after Citizens Advice said every UK household should receive a rebate on their energy bills worth £285, owing to the fact that energy networks - such as the National Grid - are making around £7.5 billion in "unjustified" profits.

Now, Ofgem are warning investors in such networks to prepare for lower returns from 2021, when the regulator plans to lower the amount they can charge energy providers for distributing electricity.

However, given that this response would suggest a partial victory for Citizens Advice and energy customers, it's very unlikely that Ofgem will go so far as demanding that networks or providers offer UK households a rebate.

Not 'justified'

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On Wednesday, Citizens Advice published research which found that, over an eight-year period, the "businesses responsible for the UK's gas and electricity networks" were making £7.5 billion more in profits than was "justified".

This was some £5.5 billion more than what the charity had calculated networks were earning in excess profits in a previous study from this February.

They concluded that the £7.5 billion arose mostly out of decisions made by Ofgem, who reputedly overestimated costs faced by networks and also failed to accurately determine just how efficient these networks were.

Because of such calculations, Citizens Advice called on energy network firms to return the excess £7.5 billion in profits, similar to how Ofwat forced water companies to return £435 of profits to customers.

The charity's chief executive, Gillian Guy, said, "If energy network companies fail to return these unjustified profits to the consumers that paid for them then the government should consider stepping in".

Ofgem the protector

Unfortunately for customers, however, Ofgem disputed Citizens Advice's findings.

Their senior partner for energy networks, Jonathan Brearley, stated, "We do think they raise some valid points, but we don't agree with their modelling or their figures".

However, soon after Citizens Advice's announcement and Ofgem's response, Ofgem published a consultation on how they'd set price controls from 2021.

In it, they suggested that these controls - which limit how much networks can charge energy providers for distribution - would be tightened up, so as to offer better protection for customers.

Speaking for a second time, Jonathan Brearley said that Ofgem believe networks "may be willing to accept lower returns for regulated assets. Setting tougher controls will ensure that Britain's energy networks deliver even better value for customers".

The regulator also noted that, over recent years, their interventions and controls had already saved customers £4.5 billion, and that "network costs on bills have fallen by 17% over the last 30 years".

High profits

This would suggest that Ofgem are already doing a good job in protecting customers from excessive bills.

However, the fact remains that at, between 7% and 12% for the 2013-21 period, the returns on investment enjoyed by networks are noticeably higher than the profits associated with providers, who claim to receive anything between 3.3% and 4%, as shown below.

breakdown of energy bills

Source: Ofgem

In fact, with an average return of 10%, Citizens Advice claim that the profit margin of the networks stands at around 19%.

This is why, even though they welcomed the news of Ofgem's "tougher" approach as "good news for consumers", they urged the regulator and energy networks to go further in helping "consumers now by providing a rebate on their bills to account for the unjustified profits".

Attracting global investment

Unfortunately, it's unlikely that Ofgem will go much further than reducing the margins of networks by a few percentage points, since as the regulator admit, they need "to set price controls that will attract global investment".

It is important to remember that consumers are paying for the £7.5bn of unjustified profits that the businesses responsible for gas and electricity networks are making over the current 8 year price control - so it is welcome that Ofgem is taking action to stop this being repeated.
Victoria MacGregor, Director of Energy, Citizens Advice

In other words, they need to entice increased investment in energy distribution by offering the very kind of large profits Citizens Advice are criticising.

This is precisely the chief issued faced by the energy industry as a whole and by the Government, who recently backed out of imposing a price cap on standard variable tariffs.

The Government want to ensure investment in energy and a competitive market, yet it's clear that this can be done only by ensuring a "healthy" profit margin for providers, which ironically means that customers will probably have to keep paying more than they'd like to.

Of course, customers can always shop around and look for one of the growing number of alternatives to the Big Six, such as Octopus' recently launched tracker tariff.

Yet this won't change the inescapable reality that, for as long as energy is provided by a market, customers will have to subsidise the profits of energy companies, and will have to make do without rebates.

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