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Ofgem Price Control Settlement

energy newsNews prompts self congratulation and forlorn hope

Ofgem have announced their latest price control settlement for the maintenance and upgrade of the UK’s electricity distribution networks.

In announcing a £17bn budget for the period 2015 to 2023, Ofgem trumpeted this was a major achievement:

  • that this was lower than the spending currently allowed
  • that this would have a positive effect on reducing energy bills
  • that consumers could benefit to the tune of £26 per year

Dermot Nolan, Ofgem chief executive said:

“As energy regulator, a core part of our role is to set price controls for these monopoly network companies.

“This is the only part of the energy bill Ofgem directly controls and our plans today will deliver better customer service and efficient investment at a lower cost for the customer.”

The problem with this claim, that was both confident and defensive, is that it has not been driven by new found efficiency (despite claims to the contrary) and instead that the latest price control period is making up for the massively erroneous budget from the previous period.

That price settlement saw a huge over budget presided over by Ofgem that freely enabled the distribution companies to undercut it significantly and retain the resultant financial benefit within their businesses. Ofgem, as has become commonplace, were seen as complicit in this miscalculation, and the customer paid the price for their error.

Any self-congratulatory praise by Ofgem therefore is not just premature it is also unwarranted.

Ofgem’s commercial naivety was again on show for all to see with their assertion that for 5 of the 6 distribution companies they had been provided with a lower budget than for which they were originally asking.

Perhaps only Ofgem are unaware that the Distribution businesses, in common with any commercial enterprise, will up the budget ante knowing it will ultimately be knocked down. Being commercially savvy isn’t a victory, it is a minimum expectation. Ofgem should know this.

That said, any cut in the costs of generating, delivering and supplying energy will be welcomed by UK consumers. From Business Juice’s own analysis we have found that of the four recipients of the constituent elements of the electricity price, the generators take 35%, the government 30%, the networks 23% and energy suppliers just 12%. Yet despite these facts Ofgem couldn’t resist a dig at the energy suppliers in this latest announcement with Dermot Nolan saying:

“In a competitive market we would expect suppliers to pass on this saving to consumers.”

Given energy suppliers generally ‘pass through’ the cost of the networks directly to customers in the energy price any benefit will be relatively small. Whilst any price reduction is welcome, the average drop in distribution costs of 7%, on a price element that constitutes 17% of the electricity price would deliver a saving of c£35 on a £3,000 business energy bill.

Indeed any such saving needs to be looked into the full context of the market; With wholesale electricity prices being traded at levels 14% higher than the current base for forward prices; and the soon to be implemented additional environmental and social obligation for Contracts for Differences (CfDs); there is significant upward pressure elsewhere on the electricity price.

This is something the energy regulator should know only too well and something they should be far more honest about. Yet in a tactic that is being increasingly seen from Ofgem the facts aren’t getting in the way of the story and energy suppliers, merely the conduit for charging are again being held up as those responsible. Nothing could be further from the truth in this instance. 

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