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Energy Blog Ofgem warns network companies of tougher future price controls

Ofgem warns network companies of tougher future price controls

Ian McKenna
by Ian McKenna August 23, 2017
EON Price Cut

Energy network companies have been told to brace themselves for a “tougher” round of price controls from 2021 by the energy regulator.

Ofgem explained it had seen “clear evidence” the cost of investment required in networks was “significantly lower” than previously assumed, and warned the new “RIIO-2” price control would reflect this. The warning followed research from Citizens Advice that found consumers had been overpaying for energy networks by around £7.5bn over the current eight-year price control.

Unprecedented pace

Ofgem noted that its current price controls will have enabled £80bn of investment in transmission and distribution infrastructure between privatisation and 2020, while lowering network costs by 17% over the same period.

With Britain’s energy system evolving at an “unprecedented pace”, Ofgem explained that the new price controls would be adaptable to ensure a wide range of energy futures are considered and allow companies to meet customer needs.

The changing energy system presents a significant investment challenge, with over 1mn kilometres of pipes and wires needing to be both updated and maintained to deliver reliable energy supplies for consumers.

Furthermore, the regulator stressed greater coordination across traditional network boundaries will be required, calling on companies to adapt and “play their part” in tackling the challenges presented by the evolution of the country’s energy system.

The regulator set out how it will set new controls capable of attracting global investment and ensuring consumers get value for money. The regulator also noted “strong evidence” investors are willing to accept lower returns for investing in very stable regulatory framework. The tougher controls, to take effect from 2021 for most networks, will look to learn lessons from the current RIIO-1 framework.

Views are invited on the initial plans until 4 September, with plans to consult on the framework structure following in 2018.

Good news for consumers

Citizens Advice had criticised Ofgem when releasing its research, stating the regulator had made three key decisions favourable to network companies’ interests that had led to the bumper consumer costs. These included overestimating the business risk for investors in energy networks, costing consumers £3bn.

While the charity welcomed the promise of “tougher” price controls, it reiterated its call for energy networks to provide a rebate to consumers to account for the unjustified profits, and for government to intervene should this not happen.

Ofgem’s review is comprehensive and appears well placed to appropriately build on the current price control.