Energy network costs: transparent and fair? Contents

Summary

Network costs (which cover the transmission and distribution of gas and electricity from power stations to households and industry) are a very significant component of household and industrial energy bills. Ofgem has created a new regulatory framework (RIIO) that was designed to ensure that costs were competitive and that profits weren’t excessive, but there is clear evidence that network companies are making higher profits than expected. This suggests that the targets and incentives set by Ofgem are too low, barriers to market entry are high and that Ofgem needs to monitor RIIO more effectively and to equip RIIO with stronger, corrective measures.

While we recognise that the new RIIO framework is an improvement on its predecessor, Ofgem has not yet created the conditions for the market to thrive and provide consumers with best value for money. In the short-term, market conditions can be improved if:

  • an interim independent audit of price controls is conducted;
  • the 40-day notification period for price changes is increased to 15 months; and
  • stronger, corrective measures are applied to companies that have received incentive payments for reducing leakages when such reductions have not taken place.

In the medium term, simplifications to charging methodologies would enable greater market efficiency; complexity prevents the market from making informed decisions. These could be achieved, for example, by conducting an in-depth study on the pros and cons of replacing the regional variations for network charges with a standard national tariff. Greater incentives to connect new and smaller energy generators to the grid would increase market competition too. Stronger incentives towards innovations in network technology would see an improvement in the UK’s energy infrastructure and attract necessary investment. We recommend that the Government and Ofgem continue to scrutinise network operators and remove market barriers to drive down costs for consumers.