On 24 February in its RIIO 2015/16 annual reports, Ofgem found that our gas and electricity networks continue to perform very well, saving money for customers and delivering increasing reliability at a low cost. Networks are the most transparent part of the energy industry, and scrutiny of all aspects of customer bills is both welcome and extremely important. Part of the debate around last week’s reports has focused on the issue of returns, and it is important that these points are addressed to demonstrate the outstanding service and value for money being delivered by network companies.
RIIO was intended to drive improvements in network performance, foster innovation, encourage engagement with stakeholders and reduce customer bills. The latest evidence from the annual reports is that companies are rising to the challenge.
Networks were found to be performing strongly against key output measurements. In the electricity networks, power cut occurrence fell by 9 per cent last year with a reduction of 50 per cent over the past 15-year period. Distribution network operators (DNOs) delivered a reduction in the length of time to connect customers. The reliability of the gas network also continues to improve, to a level whereby if you’re on the gas network your supply will be interrupted only once every 40 years. The reports showed that gas network companies are continuing to play an important role in the fight against fuel poverty, making 40,000 connections under the Fuel Poor Network Extension scheme.
All network sectors continue to deliver customer satisfaction scores that would be the envy of virtually any other industry or company. Regular satisfaction surveys by Ofgem conducted with a range of customers show consistent satisfaction of more than 80 per cent, putting networks above any energy supply company and among the very best performers in the UK Customer Satisfaction Index.
This high level of performance is being provided efficiently and affordably. With the sector underspending investment allowances in delivering key outputs, customers are benefitting financially with money automatically returned through bills now and over the coming years. Overall network costs have fallen 17 per cent since privatisation and are projected to remain flat, and in some areas fall, into the next decade.
Meanwhile, £80 billion will have been invested in critical infrastructure over the same timeframe. The emphasis on innovation under RIIO has also seen networks undergo a cultural shift in their approach towards smart solutions and new technologies, with the learnings from projects already being rolled out into business as usual for some companies and delivering almost £1 billion in savings under the current ED1 price control.
As tightly regulated companies, networks are the most transparent part of the energy industry and the latest Ofgem reports provide clarity and detail on what networks are spending and the value that customers get. We welcome this transparency and the open discussion around how future price controls can continue to drive performance. However, there needs to be clarity around some of the immediate responses to the publication of the Ofgem reports, particularly around returns. We need to be clear that levels of return are incentive based and dependent on companies providing a very high level of service. The better networks perform, the greater the benefit to the customer. It should also be recognised that there is uncertainty inherent in the type of long-term forecast used in the Ofgem’s annual report, so it is too early to speculate on the future profitability of network companies and what the end of price control rate of returns will be.
Drawing conclusions now, for example, only one year into electricity distribution controls, is misleading. Neither does the analysis take into account such things as a company’s actual debt costs, relative to Ofgem’s assumption. Furthermore, there remains considerable uncertainty about the costs network companies will face in some areas and even how these uncertain costs will be treated under RIIO. Rather than focusing on relatively meaningless forecasts for theoretical returns, the network companies would encourage Ofgem to focus on completing the RIIO regulatory framework and documenting how they can address uncertainties, reducing risk for customers and companies alike.
Networks have a strong record of investing in vital infrastructure while improving performance and keeping costs low. The 2015/16 annual reports showed that this trend is continuing, however that will require confidence in a regulatory framework that strikes the right balance between keeping costs as low as possible while delivering the significant investment required in the years ahead to keep homes warm and keep the lights on.