A cross-party group of more than 30 MPs have written to the boss of Ofgem to urge the regulator to bring electricity network profits under “tighter control”.
The letter to chief executive Dermot Nolan has been signed by MPs from the Conservatives, Labour and the DUP, including former shadow energy secretary Caroline Flint. John Penrose, a prominent supporter of a price cap on energy bills, is the lead signatory.
The document states that electricity networks were the most profitable segment of the UK power sector in 2016, citing a recent Energy and Climate Intelligence Unit (ECIU) report which found that distribution network operators (DNOs) recorded an average profit margin of 30.4 per cent during the year.
“These levels of return might be justified in a highly risky sector where big profits could turn into big losses from year to year,” it adds, “or if dramatic one-off innovations and improvements in DNO productivity and efficiency were being made.
“But this is an extremely safe, slow-paced, low-risk network monopoly where returns have been consistently higher than other firms in riskier parts of the same sector, and than riskier sectors in other parts of the UK economy, for many years.
“Nor are some DNOs making big losses at the same time as others are winning; they are making excellent returns, all the time, at the expense of consumers who have no option but to use their services.”
The current RIIO ED-1 price control for electricity distribution runs from 2015 to 2023. The letter to Nolan says the option of reopening it at the mid-way mark in 2019 to reduce allowed revenues and return profits to consumers has, “as far as we can see, not yet been explored”.
It continues: “Consumers cannot wait… If it is Ofgem’s view that the double-digit returns are unjustified, you should do something about it immediately.
“We hope you are able to move much earlier that you did with the energy price cap to use you power in this area to protect consumers”.
Ofgem has said DNO profits could come under the spotlight as part of a potential mid-period review of RIIO ED-1.
When the timetable for the process was announced back in July, Ofgem initially said its scope would be limited and it would not provide an opportunity to conduct a “mini price review”.
However, the regulator has since changed its tune slightly. Launching a consultation in November on whether or not to conduct a review, and if so what issues it should cover, Ofgem said it was considering expanding its remit to include issues relating to “financial and incentive performance and design”.
Responding to the letter from MPs, a spokesman for the regulator said:“Ofgem will take every opportunity to bear down on network company returns over the next three years and our regulation has already saved consumers over £4.5 billion since 2013.
“However, we have no plans to alter the length of the current price controls. We do not believe this would be in consumers’ interests as there is a risk that doing so could harm investor confidence and increase the cost of finance to network companies, which would put customer energy bills up.”
A spokesman for the Energy Networks Association (ENA) said: “Distribution network operators have invested £6.6 billion back into the electricity networks since the start of the RIIO price control in 2015. That’s £244 for every household in Great Britain.
“These are official, publicly available Ofgem figures, yet ECIU’s report doesn’t even mention them in their analysis… The annual cost of investment isn’t simply included in that one year’s company accounts – it is instead spread across all the annual profit and loss accounts for the lifespan those assets, which could be as long as 60 years.
“ENA is engaging with parliamentarians as part of its work to ensure that they have access to the accurate information they need about the performance of the energy networks in Great Britain, and to answer any questions that they might have.”