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 calleda 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 Billionsshowed 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.


Energy price cap ‘could be gamed’, warns regulator

The Government’s crackdown on rising energy bills could be gamed by suppliers offering pricier ‘green’ tariffs via a legislative loophole, the industry regulator has warned.

Ofgem warned MPs that its plan to cap standard energy tariffs could be undone if energy companies are able to claim their tariffs carry green credentials in order to charge more for their electricity and gas.

Ministers are preparing to legislate a market-wide cap on all default tariffs in a bid to end “rip-off” energy deals, but low-carbon offerings will not face the same clampdown because costs for green energy are higher.

The potential escape clause has emerged almost a year before the controversial price cap, which many fear could bring a raft of other unintended consequences including lower consumer engagement with the market and reduced competition.

Dermot Nolan, Ofgem’s chief executive, told a parliamentary select committee on Wednesday that customers switching between tariffs could fall under a price cap but said that the switching rate alone would not determine whether the market is working for consumers.

He later admitted that the regulator has not sought the opinion of consumers on the price cap plans but would agree to undertake a survey before it is implemented.

In the meantime, Mr Nolan called for tougher wording in the bill to make clear that companies cannot dodge the cap by making spurious green claims about the energy it supplies.

He added that Ofgem was prepared to issue pre-emptive warnings to companies which may be tempted to exploit the loophole.

“I am saying that loudly and clearly,” he said. “Commercial companies will generally try to make money. To assume they won’t is probably unwise. We will police this as intensively as possible.”

Mr Dermot, who has led the regulator for four years, faced a barrage of questions from the committee over his tenure at the helm and denied that he has acted as a passive bystander to the growing concerns over energy bills.

He added that he had not been awarded a bonus for 2017 and apologised for not acting sooner to bring in the new energy cap for vulnerable customers.

He also promised that any supplier found to be wrongfully using the green-tariff exemption to charge customers above the price cap would be forced to withdraw the deal immediately and repay the excess charges on top of a penalty determined by the regulator’s specialist panel of disciplinarians.

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UK energy price cap could come into effect by Christmas 2018, Ofgem says

Energy bills have doubled in Britain over the past decade to an average of about £1,200 a year

Energy regulator Ofgem has said that a plan to cap standard variable energy tariffs for millions of British households could be in place by Christmas this year.

In October, Prime Minister Theresa May  pledged to introduce legislation to end “rip-off” energy prices by putting a price cap on bills.

Speaking to a parliamentary select committee on Wednesday, Ofgem chief executive Dermot Nolan said that for a cap on energy bills to come into force by the end of the year it would need to become law before politicians and lords break up for the summer recess in July.

Once that law is passed, Ofgem will need to launch a statutory consultation process of around 50 to 60 days, after which energy suppliers will be given a further grace period to implement the necessary measures.

The Business, Energy and Industrial Strategy Committee was questioning Mr Nolan as part of its pre-legislative scrutiny of the Government’s draft bill to cap energy prices.

Annual energy bills in Britain have reportedly doubled over the last decade, rising by about £1,200 per household.

Figures from Ofgem show that 57 per cent of households – or around 13 million – are on standard variable rate tariffs which are typically the most expensive. They are the basic rate that energy suppliers charge if a customer does not opt for a specific fixed-term deal.

Mr Nolan said that vulnerable customers had been failed by the system and admitted that Ofgem should have done more to help them earlier.

“I accept we should have done better with vulnerable customers,” he said.

Committee chairwoman Rachel Reeves accused Mr Nolan of acting “like a bystander rather than an active participant in the market” and challenged him over Ofgem staff bonuses which reportedly totalled £921,000 for the 2015/2016 tax year.

“Your role is not to hope that next year fewer people are paying more than they should be on standard variable tariffs, but to stop this exploitation of customers,” she said.

Mr Nolan said that bonuses were calculated according to civil service guidelines.

Ofgem confirmed to The Independent that Mr Nolan and other members of the executive board did not receive a bonus for the 2016/17 tax year.

Ofgem is introducing a safeguard tariff in February that will help protect around a million vulnerable customers from overpaying on their energy bills. The regulator has said that it plans to extend the scheme to two million more households next winter.

Data also published by Ofgem in December showed that among Britain’s “Big Six” energy suppliers, SSE had the largest percentage of customers on SVTs at 71 per cent.

British Gas, owned by Centrica, had 67 per cent of its customers on SVTs and E.ON had 61 per cent.

The country’s other three main suppliers are EDF Energy, Innogy’s Npower and Iberdrola’s Scottish Power.

Additional reporting by Reuters


Theresa May faces backlash over plans for ‘absolute’ price cap on energy bills

Theresa May is facing a backlash from senior Conservatives over her plans for a price cap on energy bills.

Almost 20 Tory MPs, including three former cabinet ministers, have warned that her proposals for an “absolute” cap on bills will reduce competition between firms and “distort” the energy market.

In a formal submission on the Government’s draft Energy Price Cap Bill, the backbenchers, including Oliver Letwin, David Cameron’s former policy chief, and Caroline Spelman, the former environment secretary, say that the measure will lead to prices simply being raised to meet the new limit.

Instead, the MPs call on Mrs May to introduce a “relative” cap, which has found more favour with MPs ideologically opposed to interventions in free markets.

Unlike an absolute cap, which would set an overall maximum price, a relative cap would set a maximum mark-up between each energy firm’s best deal and the standard variable tariff paid by most customers.

John Penrose, a former constitution minister, who had campaigned for a price cap, said that a “relative” limit was a “Conservative answer” to the problem of “rip-off prices” – while an absolute cap “would cut customer choice and competition”.

The announcement of a new bill introducing an energy price cap was one of the centrepieces of Mrs May’s speech to the Conservative Party’s conference in October and was seen as a key element of plans to win back disaffected voters.

The intervention by Mrs May’s MPs, who were joined by senior figures from Labour and the Scottish National Party, will put pressure on the Government to overhaul the current proposals before a final version of the bill is submitted to the Commons in the coming weeks.

The disclosure of the submission, to the business and energy committee, comes ahead of an appearance in front of the committee by Margot James, the minister for consumers, on Wednesday, when the criticisms are likely to be raised with her by MPs, who are scrutinising the draft legislation.

It was led by Mr Penrose and signed by 19 Tory MPs, in addition to Patricia Gibson, the SNP’s consumer affairs spokesman, Ben Bradshaw the former Labour cabinet minister, and Caroline Lucas, the leader of the Green Party. It was also signed by eight “challenger” energy firms.

The document states that a cap is necessary because the market is failing to “work in favour of consumer”.

But it adds:”The draft bill proposes an absolute price cap, where regulators meet every six months and pick a number.

“It will reduce competition because supplier prices will cluster around a single number rather than pricing off each one’s best competitive deal. Suppliers will sit at the ‘regulatory’ level with little incentive to become more efficient.

“It will [also] be more vulnerable to politics and lobbying, because it is set by regulators rather than customers. And the Big Six have far bigger teams of lobbyists than the challengers.”

The MPs add: “It’s a highly distorting approach which replaces daily market-derived prices with infrequent regulator-derived ones, which throttles competition by being far less good at discovering and then meeting consumer needs.

“The capped prices will be out of date as soon as wholesale gas prices change.”

By contrast, a relative cap would “protect customers” who fail to switch to cheaper tariffs while still leaving “a worthwhile incentive for those that do.”

“It restores the link between the prices which companies advertise in the marketplace and those which they charge the majority of their customers, incentivising efficiency and restoring competitiveness to the market for ‘back book’ customers,” the submission to the business committee states.

This weekend a a spokesman for the business and energy department insisted that an absolute cap set by Ofgem “is the best way to protect all consumers and ensure the cap is not gamed.”

“A relative cap may simply prompt the withdrawal of more competitive rates by larger companies while offering no protection to people on poorer value tariffs,” the spokesman said.


Energy supply start-up folds following gas price shock

The first casualty of Britain’s recent gas supply shock has emerged after a small supply start-up said it would need to close due to tough energy market conditions.

The closure of Brighter World Energy comes just weeks after the UK gas market rocketed to five-year highs, raising fears of a financial crunch for small suppliers.

The energy minnow, set up a little over a year ago, said it had made the “difficult decision” to shut the business because market conditions had made its ‘buy-to-give’ business model unsustainable.

The supplier had hoped to set itself apart within the crowded energy supply market by promising to help install a solar-powered micro-grid in an African village for every 2,000 customers it signed up.

“We have taken the tough, but responsible, decision to close at this time, because we no longer believe that market conditions, or our underlying operation, make for a sustainable business model in the long term,” said Cheryl Latham, the supplier’s chief executive, on the supplier’s website.

The gas price shock, which ripped through the market at the end of last year, has reignited fears that smaller suppliers may fold under the pressure of higher costs.

The risk of a gas supply crisis was sparked last month by the emergency shutdown of the UK’s most important North Sea pipeline amid technical issues in Norwegian waters. The next day a deadly explosion at a key European gas hub compounded fears and drove prices higher.

In the wake of the market surge it emerged that Flow Energy and Spark Energy both missed a payment deadline for their share of a Government scheme that helps vulnerable customers pay their winter gas bills.

But the aftershock is likely to hit standard energy account holders too as suppliers begin to raise tariffs to meet the higher costs.

One of the market’s fastest growing new suppliers is understood to be on the brink of announcing a significant tariff hike for its newly won customers, according to industry sources.

Already Good Energy has delivered a hike of 7pc for 70,000 customers just before Christmas, and Toto Energy raised its standard variable tariffs by 22pc. The minnow also angered customers by calling for a 50pc hike from their direct debit customers on fixed tariffs, before backing down from the ‘seasonal’ winter price change, saying it was a “misprint”.

Senior industry sources have consistently warned that the market is vulnerable to dramatic energy price spikes, because small suppliers often offer rock-bottom energy prices without the financial backing to absorb a market shock.

A spokesman for the industry regulator told the Sunday Telegraph last month that it was monitoring the market for wider financial risks to suppliers, including price increases, and is also closely monitoring individual suppliers with a focus on financial indicators.

Brighter World’s customers will be passed on to its partner company Robin Hood Energy, a not-for-profit supplier, with no change to their contract terms or account balances. Brighter World will also waive any exit fees for those customers who would prefer to leave Robin Hood.