Ofgem gets thumbs-up for plans that will slash energy bills

The competition watchdog will allow the energy regulator to limit shareholder returns.

August Graham
Thursday 28 October 2021 15:14
Electricity networks charge suppliers, who pass on the cost to households (Peter Byrne/PA)
Electricity networks charge suppliers, who pass on the cost to households (Peter Byrne/PA)

The competition watchdog has upheld plans that will likely slash around £9 off household energy bills.

The Competition and Markets Authority dealt a blow to investors in the UK’s energy networks as it sided with its fellow regulator Ofgem on a key policy decision.

Networks had appealed against Ofgem’s decision to halve the amount of money they could pay to shareholders.

The payouts ultimately come from household energy bills.

The decision is expected to save every customer around £9 off their bills.

Energy networks charge suppliers to use their grids, and suppliers then pass this cost on to households.

Citizens Advice has estimated that high returns will allow networks to overcharge customers by £7.5 billion between 2013 and 2023.

The CMA’s decision will now allow Ofgem to slash these shareholder returns to 4.55% over the next five-year period.

The decision upholds the CMA’s provisional finding.

The payouts were one of the main areas of contention when nine energy networks appealed to the CMA to protect their shareholders’ payouts.

Citizens Advice chief executive Dame Clare Moriarty said: “This decision is good news for consumers and a major step forward in fixing the problem of excessive profits made by network companies.

“It sends a clear signal to the companies still to go through the price control process (electricity distribution networks) that they won’t be getting the same bumper payday as last time round.

“But we shouldn’t be under any illusions – the price control and appeals processes are skewed in favour of the networks.

“There is still too much scope for companies to make hundreds of millions in unearned profit at consumers’ expense.”

Both National Grid and SSE’s transmission unit said they are “disappointed” by the CMA’s decision on the so-called cost of equity.

National Grid had warned that the figure was set so low that the UK could lose out on much-needed investment as it tries to eliminate net greenhouse emissions by 2050.

However, the networks had more cause for cheer elsewhere, as the CMA struck down part of Ofgem’s decision known as the outperformance wedge.

Ofgem believed that the networks were likely to outperform over the next five years, so took this into account when calculating how much they could charge customers.

This would have slashed National Grid’s revenues by £90 million, the company said.

National Grid accused Ofgem of basing its findings on an “inconclusive academic report”.

The CMA said there was a realistic chance that Ofgem’s decision could “undermine broader regulatory certainty which could result in increased costs to consumers over time”.

It said Ofgem was wrong on this issue, and ordered the regulator to remove the outperformance wedge.

SSE said it “welcomes that the CMA has upheld its appeals against the assumed outperformance wedge”,

However, SSEN Transmission said it is disappointed that the CMA has not upheld its appeals on the flawed cost of equity, or on changes to how Transmission Network Use of System Charges are recovered and the associated risk of under-recovery this presents.

It said it will continue to assess the full details of the CMA’s final determinations as they become available and remains committed to work constructively with Ofgem and wider stakeholders as it takes forward ambitious plans to deliver a network for net zero.

Akshay Kaul, director of networks at Ofgem, said: “We welcome the Competition and Markets Authority’s final determinations, which we believe achieve the right balance between affordability, sustainability, and practicality, while broadly supporting and reaffirming Ofgem’s decisions on setting price controls.”

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