Business

Customers 'overpaid for electricity for years'

Electricity pylon Image copyright AFP

Customers have overpaid on electricity for seven years because the regulator has made targets too easy for network operators, a watchdog has said.

The National Audit Office (NAO) said regulator Ofgem allowed the companies which run the wires and pylons to make bigger profits than they needed to.

This £800m of excess returns meant bills have been creeping up by £1.60 more than necessary per year.

Ofgem said the excess could have hit £13 without action.

Gillian Guy, from Citizens Advice, said the report was proof that "energy networks have enjoyed a major windfall at the expense of consumers".

What happened when rules were set?

The privatised electricity supply business is divided into the supply companies - the ones customers deal with, which buy and sell the power - and companies which manage the delivery of electricity from power stations to our homes.

These transmission and distribution companies, which include the National Grid, are in the private sector but there is an upper limit to the return they are allowed to make, set by Ofgem.

Current rules, known as RIIO-1, give electricity networks an allowance to run and invest in their systems. If they spend less they can keep half of the savings and return half to customers.

During the full eight years of RIIO-1, due to end in 2021, the distribution networks expect to underspend by 3% on average. One company, National Grid Energy Transmission, forecasts a 22% underspend. Only one business will overspend its allowance.

The National Audit Office accuses Ofgem of being too fearful, when setting the controls, that the companies might fail and have to be rescued.

As a result, the NAO said, energy network investors have seen returns of 9%, compared with between 5% and 6% at other UK companies.

Ofgem has already indicated it will clamp down on generous investor returns as it plans for RIIO-2, the next round of price controls.

"Our tough new round of price controls will lower returns to save consumers money, whilst pushing companies to go further on decarbonisation and ensuring we retain one of the world's most reliable energy systems," said Akshay Kaul, Ofgem's director of network price controls.

Regulator 'must hold its nerve'

Gas and electricity networks have been heavily regulated since they started to be privatised in the late 1980s.

The supply business has benefited from a huge proliferation in competition, but Ofgem has been unable to encourage the same explosion in networks because they are natural monopolies.

Citizens Advice has campaigned for changes to network returns.

Ms Guy said: "Ofgem has made good progress towards a tougher settlement next time around. The regulator must hold its nerve, resist the efforts of networks to water down its proposals and deliver a price control that works for consumers," she said.

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