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@ofgem's price control process determines how much energy network companies are allowed to collect from consumers over the next 5 year period — and current proposals are set to save consumers £3.3 billion
But at @CitizensAdvice, we think they can go £1.7billion further
But at @CitizensAdvice, we think they can go £1.7billion further
In 2017, we found that energy networks were making £7.5 billion in unjustified profits due to errors by the regulator.
The majority came from the cost of shareholder investment (the cost of equity) and the cost of borrowing from the debt markets (the cost of debt). https://www.citizensadvice.org.uk/about-us/policy/policy-research-topics/energy-policy-research-and-consultation-responses/energy-policy-research/energy-consumers-missing-billions/
The Cost of Capital (basically what it costs to finance investment in the network) is one of the areas that matters the most to consumers. It is also one of the most complex.
Small changes in the assumptions that make up these costs can translate into £millions on bills.
Small changes in the assumptions that make up these costs can translate into £millions on bills.
Most UK energy networks aren't listed on the stock exchange, so Ofgem has to estimate what investors would pay to invest in these companies.
One of the things they look at is how risky they are.
One of the things they look at is how risky they are.
We think there is good evidence @ofgem has overestimated this, which would allow networks to make higher returns than they would on a competitive market.
In total we think these changes could save consumers £1.7 billion over the course of the price control.
In total we think these changes could save consumers £1.7 billion over the course of the price control.
We’ve looked at the problem from a number of angles — and we’ve made 8 recommendations to @ofgem in our response to their proposals.
For example, networks have always outperformed the estimates set, so @ofgem have anticipated that and proposed a downward adjustment of 0.25%.
For example, networks have always outperformed the estimates set, so @ofgem have anticipated that and proposed a downward adjustment of 0.25%.
So an alternative method to the changing the assumptions within the cost of capital would be for Ofgem to increase their adjustment. We think the evidence supports increasing this adjustment from 0.25% to 1.60% . Doing that would reduce allowed returns by up to £1.2 billion.
Some commentators have claimed there's a risk investors will put their money in other markets, like the USA. But these companies are an incredibly safe bet financially.
We have recently seen investors purchasing GB energy networks in the knowledge Ofgem has said returns will be lower than they have been historically. https://www.current-news.co.uk/news/electricity-north-west-confirms-50-stake-sale
Companies themselves have said they may accept a lower cost of capital than RIIO-1, but this isn't the same as accepting Ofgem’s proposals. So its vital @ofgem hold their nerve, and look seriously at our evidence that says costs could be even lower.
'For more information, I've taken a closer look at why @ofgem can be braver — and save consumers a further £1.7 billion https://wearecitizensadvice.org.uk/how-low-can-you-go-ae240aad2a1e
https://wearecitizensadvice.org.uk/how-low-can-you-go-ae240aad2a1e
