There’s no denying that the energy sector’s reputation is at a low point. It is difficult not to have an opinion on rising bills. Everyone is affected in some way, and everyone has a view – from the man on the street to the prime minister (and ex-prime ministers, for that matter).
There is genuine anger at the sector as suppliers are perceived to announce price rise after price rise, and almost always just in time for winter. Such vitriol towards energy companies is widespread. You need only look at the reaction that British Gas received when it took to Twitter for a Q&A the day it announced a 9.2 per cent rise in bills. Reading through the search results of #AskBG is not for the fainthearted.
We are all so dependent on power for heat, light, work and play. But are the price rises justified? And should the whole industry be tarred with the same brush?
The suppliers almost universally have a three-point defence of the rises:
• higher wholesale costs;
• government green schemes;
• the cost of getting power to people’s homes.
It is the third of the points above with which I take issue – at least where electricity is concerned.
Distribution network operators (DNOs), such as ours in the North West, are responsible for taking power from National Grid, and delivering it to homes and businesses across the country. Our service, and even our existence, is often hidden from the view of many consumers and is rarely explained on bills. We are wholly separate to suppliers and I am proud of our service and value.
The network of wires across the UK covers half a million miles (the same distance to the moon and back, or 20 times around the world, if you like). The cost of maintaining those cables, transformers, substations, control systems and everything else involved in managing such a vast infrastructure, makes up just 16 per cent of a typical domestic electricity bill. That’s around £100 – less than £2 a week – and represents excellent value.
Since privatisation, networks have delivered improved efficiency, delivered improved quality of supply and committed to significant investment programmes.
Investment in the networks has increased significantly in recent years following a fall after privatisation as DNOs made big strides in asset utilisation and management. Significant increases in investment are required to replace old and worn out equipment installed in the rural electrification programmes of the 1950s and 1960s. The current price control period from 2010 to 2015 required a 25 per cent increase in investment from the previous five years as a result.
DNOs have a good track record of improving efficiency while delivering essential investment. Despite the 25 per cent increase in investment, prices were adjusted at the start of the price review period to keep them low in response to the financial crash of 2008, then allowed to rise by 5.6 per cent a year.
Suppliers have known since 2009 that these rises were coming, and in the grand scheme of things they are relatively small. The proposed rise in 2014 would add an average of just over £5 to an overall electricity bill that is nearing £600 (a less than 1 per cent increase in the overall bill).
RIIO-ED1, the latest price review for which Ofgem is currently assessing DNOs’ plans, has done a fantastic job to encourage network operators to drive down costs even further. Proposals submitted to the regulator earlier this year include an average DNO price reduction of 11 per cent in nominal terms from 2015, despite investment levels being maintained.
Electricity North West has gone further and we have proposed a price reduction for our distribution costs a year early in 2014 – forgoing an already-agreed rise of 8.5 per cent. Our prices will then reduce by another 18 per cent at the start of RIIO-ED1 in 2015 and will only rise with inflation until 2023.
We have listened, and continue to listen, to what our customers are saying. They want us to invest in the future, unsurprisingly “keeping the lights on” is seen as our number one priority. But we have to make it affordable and sustainable while also delivering the excellent customer service that is quite rightly expected.
If approved, we believe that our plan will reduce costs and improve our service. It is suppliers who pay us for distribution, then recharge customers for it, along with the other elements that make up energy bills. Unfortunately, one thing we cannot do is force suppliers to pass on savings from our plans to customers.
Customers demand transparency. Networks have delivered this in spades through consultations and publication of detailed business plans. We are proud of the value we offer customers, and they’re
happy too.
In marked contrast to electricity retailers, customer satisfaction with electricity distributors is at an all-time high, with average satisfaction ratings among customers who have had cause to contact the DNO at 80 per cent and rising.
Looking forward through the new RIIO price control, Ofgem has challenged DNOs to address the issues of managing affordability, facilitating the move to a low-carbon future, and meeting customers’ and stakeholders’ ever-increasing service expectations. DNOs have responded very positively, proposing further improvements in service levels, continuing investment (more than £29 billion over eight years) as well as price reductions.
When the component parts of a bill increase, it is understandable that the overall bill will increase. When the component parts go down – as distribution charges are set to do potentially as early as March next year for North West customers – I can only hope that the huge work we have put in to reduce costs will be reflected in customers’ bills.
Steve Johnson, chief executive, Electricity North West