Ofgem’s plans to deliver savings of over £5bn to consumers through tougher price controls for energy networks moved a step closer recently.
Great headline and all sounds good in theory. If those figures are correct, £15 to £25 a year, put it in perspective is around 29 to 48 pence per week!
The price controls set the revenue monopoly network owners can earn from charges to consumers. Ofgem has confirmed that the default length of the next controls from 2021 will be five years (compared with the current eight years) leaving the door open for a review sooner rather than later.
There is no change to the 3%-5% cost of equity range (the amount the companies can pay their shareholders) at present. This is the lowest rate ever proposed for energy network price controls in Great Britain. Ofgem themselves estimate this would result in savings of over £5 billion for household consumers (or about £15 – £25 per year on the dual fuel household bill).
Acting in the interests of the consumer, Ofgem are proposing to take £5 billion out of an industry that has made massive profits in the past, but is still crying out for wholesale investment in infrastructure. There may be great and noble intentions behind it, but even according to Ofgem’s own figures, the UK’s energy prices are right in the middle of the range of prices across Europe.
Will this turn out to be as useful in the real world as the Smart Meter initiative? Consumers are still under the impression that just having a smart meter will save them money. The opposite is in fact the case. Everyone who has a smart meter is paying for it in part in their standing charges over their contract term. If used as intended, they can make a difference to a households’ overall consumption, but in our experience, they soon become ‘background noise’ as the novelty wears off. Add to this the fact that many first generation smart meters only work if you stay with the installing supplier and there’s room for improvement in the scheme.
Ofgem will also extend the scope for opening high value network upgrades to the benefits of competition across the gas and electricity sectors in the next price controls. To signal its intent Ofgem has confirmed that National Grid can build the grid upgrade to connect the new Hinkley Point C nuclear power station. However, Ofgem will set the revenue National Grid can earn from the upgrade based in part on its experience in cutting the costs of connecting offshore wind farms to the grid by tendering the ownership of these links.
Jonathan Brearley, Ofgem’s executive director for systems and networks, said: “Today we have set out our plans which will bring in tougher price controls with lower expected returns for network companies. This is part of our ongoing programme to ensure that consumers get reliable and secure power supplies at a fair price.
“As part of this continuous drive to deliver value for consumers we are using a new benchmarking approach to cut the costs of connecting the new Hinkley Point C nuclear power station. This is another example of how we are evolving regulation to deliver the upgrades to our power network while ensuring the impact on bills is kept as low as possible.”
Ofgem’s decision on the framework for setting the next price controls also confirms that new independent user groups and customer engagement groups will be set up by each of the companies to give consumers a stronger voice in how the price controls are set. For the first time open hearings will take place in the spring of 2020 where companies’ spending plans will be scrutinised. This is another interesting point. I’m keen to see the details but speaking as a utilities broker, surely the way customers express displeasure with a suppliers’ prices or service is with their feet?
Ofgem is also retaining a funding package in the next price controls for innovation. Technologists, scientists, inventors and innovators will be able to use this funding to solve some of the biggest research and development challenges in adapting the energy networks to a smarter, more flexible energy system. These include increased use of electric vehicles, more local production of energy and integrating digital technology. This is welcome news, but why not pay for this research and investment by not capping prices and taxing the supply companies, say £5 billion? We could all then set about helping and educating consumers to switch suppliers or enrol in a contract and save a minimum of £150 to £250 pounds a year, not £15 to £25.