Electricity network firms’ profits add £10bn to bills

Analysis finds average annual profit margin of 32% in monopoly sector

The six companies that run the cables bringing electricity to homes and businesses across the country made annual average profit margins of 32% over the last six years, a new analysis concludes. 

Electricity Meter By James Burrell

A Government review of energy costs is currently underway. Image: James Burrell, creative commons licence

This equates to about £10bn on the nation’s collective energy bill over six years (2010-15), or around £27 per home per year.

The analysis from the Energy and Climate Intelligence Unit (ECIU) found that these Distribution Network Operators (DNOs) paid dividends to their shareholders during this time amounting to 15% of turnover – roughly half of the final profit. This equates to almost £1bn (£850m) per year, or roughly £13 on the average domestic bill.

The report is published as the government’s much-anticipated review of energy costs, written by Professor Dieter Helm, gets underway.

Commenting on the report, John Penrose, MP for Weston-super-Mare, said: "This report suggests that Ofgem has been asleep at the wheel while the network operators have been overcharging everyone for years.

"What’s the point of a regulator that doesn’t stick up for consumers against vested interests, whether it’s the Big Six energy firms or the firms that own the pipes and wires which get energy and power to our homes?

"We need a heavyweight, cross-sector regulator that isn’t scared to do its job and which won't turn tail and run at the first sign of resistance."

A recent Citizens Advice report said that the businesses responsible for both the UK’s electricity and gas networks are making £7.5bn in ‘unjustified profit’ over an eight-year period, arguing that the money should be returned to consumers.

Richard Black, director of the ECIU, said the Helm review should look across the entire energy supply chain, including at whether profit margins are fair.

“Britain can be proud it has one of the most reliable power networks in the world; the lights aren’t going out and the network firms can take some of the credit for that.

“But this doesn’t require that we write blank cheques; and just as profits of the ‘Big Six’ have rightly come under the magnifying glass, the companies operating the power cables deserve scrutiny too, particularly with such large chunks of dividends leaving the UK economy.

“The UK’s power sector is a somewhat murky world and it’s easy to blame ‘green levies’ but that argument doesn’t really hold much water. More stones need to be turned over and we hope Dieter Helm’s energy review is bold enough to take that on.” 

Although UK household energy bills are close to the average of other EU states, commercial electricity bills are relatively high, with the Committee on Climate Change (CCC) recently concluding that higher wholesale prices and network charges are probably to blame.

Catherine Mitchell, Professor of Energy Policy at the University of Exeter, said that more of DNO’s profits should be reinvested in the network, arguing that operators have a vital role in modernising the UK power system:

“The distribution network operators have an absolutely vital role in helping our power sector to modernise, enabling a less wasteful, more market-driven system with these firms taking an active role in balancing supply and demand locally and encouraging small-scale power generation, as well as more efficient use of energy.

“But the amounts being invested in this much-needed transition by these companies are currently pitiful. More of these profits should be reinvested in giving the UK an electricity system fit for the 21st century. In addition, the regulation should be much more focused on them delivering what customers want and helping to meet public policy goals - something they currently merely nod at. If they do that well then they should get a fair return but if they do that badly then their return should reflect that.   

“Estimates suggest up to £8 billion could be cut from the UK’s electricity bill if we embrace smart, modern technologies which is what the Government says it wants and would deliver a clear benefit for consumers.”

Ofgem recently suggested that ‘green levies’ are not to blame for recent energy retailer price increases; although low-carbon policies add an up-front charge of around £9 a month to the typical UK household energy bill, thanks to efficiency measures their overall impact is a cut of more than £20 a month.

The report, Monopoly money: How the UK’s electricity distribution network operators are posting big profits, is available here