OFGEM in hot water as National Audit Office reveals Consumers have overpaid for electricity for years

According to the NAO , Ofgem’s poorly conceived spending rules introduced in 2013 allowed energy networks to make huge profits at the consumers expense. Such excess resulted in consumer energy bills climbing by £1.60 more per household than they should have per year over a seven-year period.

The NAO report goes on to say that Ofgem were too fearful when setting the ROI-1 controls that the companies in question could fail and result in a government funded rescue. As a result, investors in the energy networks saw returns as high as 9% compared to 5% or 6% seen at other companies in the UK.

“If Ofgem had placed greater weight on the most up-to-date evidence on network company risk, consumer could have paid at least £800 million less in total,” the NAO said in its report.

The report said Ofgem set cost budgets which were too high, and performance targets which were too low. It also overestimated how much money the network companies’ shareholders would need to encourage them to invest in upgrades to the grid.

Alan Whitehead, the shadow energy minister, said: “The NAO have demonstrated that whilst energy networks have provided a good reliability of service, this has been achieved at far greater cost to customers than might otherwise have been the case had price and development controls been properly managed. Ofgem need a tighter rein on network company profits, refocusing investment on low carbon grids.”

RIIO is Ofgem’s performance-based model that was designed to ensure that consumers get needed investment into the UK’s energy network at a fair price. It stands for – Revenue Incentives Innovation and Outputs.

RIIO-T1 is the price control for gas transmission and electricity transmission. RIIO-GD1 is the price control for gas distribution. RIIO-ED1 is the price control for electricity distribution. Each of the current price controls are set to run for an eight-year period.

The next network price controls will start from 2021, under the new RIIO-2

Ofgem has already hinted that it will be clamping down on generous investor returns as it plans for RIIO-2, news that has created anger from some foreign investors. Read more here

"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.

Further Reading

Energy Price Forecast 2020

What does 2020 hold for the UK Energy Market?

Ofgem vows to ‘squeeze investor returns’ and reduce consumer electricity bills