Network firms’ high profits add £20 to energy bills

Electricity network companies’ exceptionally high profits are set to add £20 to household energy bills this year, despite regulator Ofgem introducing a new regulatory regime designed to control profit margins, a report finds.

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The analysis, from the Energy and Climate Intelligence Unit (ECIU), finds that in the first year of the price control mechanism known as RIIO, the six distribution network operators (DNOs), the firms that operate regional power networks, posted an average profit margin of 30.4%, with average dividends at 13.3%.

If DNOs continue at the same level of profit margins this year, that will make the average annual household electricity bill about £20 higher than if their profits were at a similar level to those of the ‘Big Six’ energy firms. Network costs now make up more than a quarter of the average domestic electricity bill, a share that is set to rise in coming years.

Commenting, Richard Black, director of the ECIU, said that the findings should open up the debate around energy bills.

“Ministers, the press and the public are rightly worried about energy bills, and the news that these monopoly operators are making profits beyond most companies’ wildest dreams will only add to these concerns,” he said. 

“We are currently in the middle of what the former head of National Grid has called a revolution in the way our electricity is produced and supplied. It’s essential therefore that we have an open, honest and transparent debate about the costs of every part of the energy system.”

An ECIU report last year found that DNOs made annual average profit margins of 32% over the previous six years, equating to about £10bn on the nation’s collective energy bill over six years (2010-15), or around £27 per home per year. The DNOs argued that the introduction of RIIO would change this picture: ECIU’s new report suggests that, from the evidence available, RIIO has made no impact on profits or dividends.

These findings add further weight to calls from Citizens Advice for network companies to return excess profits to customers. The 2017 report Missing Billions showed that consumers are set to overpay by £7.5 billion during the current RIIO period.

Commenting on the report, John Penrose, MP for Weston-super-Mare, said:

"Ofgem has admitted it was asleep at the wheel on energy price caps.  Now it has a chance to do better by using its powers to take on the monopoly Distribution Network Operators (DNOs) which own the power lines that get energy to our homes.

"The DNOs are low risk, monopoly businesses. But they have even fatter profit margins than the Big 6 energy firms, all paid out of the pockets of hard-working energy customers. 

"If Ofgem lets them go on getting fat at energy bill-payers’ expense, it should be scrapped and replaced with a proper cross-sector regulator that isn’t afraid to use its teeth."

Prof Catherine Mitchell, Professor of Energy Policy at the University of Exeter, highlighted the ‘vital role’ that DNOs have:

“DNOs have a vital role in the transition to the energy systems of the future, connecting and managing the distributed, democratised, low-carbon network to ensure that consumers can benefit from the plummeting costs of renewables. However, whilst many of the firms deserve credit for their work in promoting the transition to smart power networks, Ofgem’s failure to corral companies in the right direction – with these high profit margins appearing instead – places the shift to a modern, flexible grid at risk,” she said.

“Overall annual benefits from this switch to smart grids have been calculated to be as high as £8 billion for the UK. This is on top of cleaner air, reduced dependency on fossil fuel imports and a reduced need to push through technologies that the public doesn’t want, such as fracking. This report again highlights the urgency of the challenge facing Ofgem and the DNO companies, and has rightly resulted in fresh calls to tighten up the ship.”

The report, RIIO Carnival: How new Ofgem regulations are failing to hit high network company profits, is available here