How new Ofgem regulations are failing to hit high network company profits
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Network costs – payments for transporting electricity from generator to user – are the second-biggest component of domestic electricity bills, accounting for 27% of the total. And according to government advisors, high network costs are one of the reasons why British industry pays more for electricity than most of its European competitors. Unlike virtually all other European nations, electricity transmission and distribution in the UK is carried out by private companies – and as these are monopolies, revenues are regulated by Ofgem.
An ECIU report last year showed that the six companies that operate Britain’s regional electricity distribution networks made extraordinarily high profits for the period 2010-2015, averaging 32% of revenue. Around half of this is paid out as dividends.
The distribution companies’ lobby group, the Energy Networks Association, described our previous report as ‘flawed’ and ‘out-of-date’, but gave no reasons other than that our findings related to the period before a new regulatory regime, known as RIIO, came into force. The implication was that RIIO would reduce profit margins down to a more reasonable level.
Now all of the network operating companies have released at least one annual return from the period after RIIO came into force. Examining these shows that nothing has changed. In the first year of RIIO, the six distribution network operators posted an average profit margin of 30.4%, with an average dividend pay-out ratio of 13.3%.
To download the report, click here.