Energy transportation businesses are natural monopolies – there is no realistic means of introducing competition.
In this sector Ofgem protects customers’ interests by regulating the companies through five-year price control periods which include curbs on expenditure as well incentives to be efficient and to innovate technically.
The price controls set the maximum amount of revenue which energy network owners can take through charges they levy on users of their networks to cover their costs and earn them a return in line with agreed expectations.
The users in this case could be electricity generators which connect to the network or shippers which use gas networks to transport gas to customers.
Energy transportation charges make up about one fifth of a household customer’s bill. Therefore when Ofgem reviews the price controls every five years it looks to balance the need to allow the companies appropriate resources with the need to protect customers’ interests.
Price controls are set for the 14 companies that run the regional electricity networks, the four companies that operate the energy transmission networks and the four companies that own the local gas distribution networks.
An important piece of work that the networks team has undertaken with the Department of Energy and Climate Change has been to set up the regulatory framework for the operation and licensing of cables that will carry electricity from offshore wind farms to the onshore grids. These links will be subject to the same price control approach used for onshore networks.