Ofgem announces £17 billion for electricity network and cuts bills for consumers

Publication date
30th July 2014
Information types
Policy areas
  • Electricity distribution part of bill to fall by £12 on average from April 2015 while customer service standards rise
  • £2.1 billion of savings achieved since Ofgem sent back companies’ initial business plans last year
  • Ofgem continues to deliver a stable regulatory environment that secures investment in Britain’s vital infrastructure at a fair price to consumers

Ofgem has today set out its proposed price control settlements for five of the six companies that run Britain’s local electricity network, which transports energy into homes and businesses.

Ofgem’s proposals would see the network companies spend £17 billion to upgrade and maintain Britain’s local electricity network. At the same time, this part of the energy bill – which accounts for 8% of an annual dual fuel bill – will be on average £12 a year lower than it is today for the eight-year period of the control. These proposals are planned to come into effect in April 2015 and run until 2023.

Last November, Western Power Distribution was the only company to have its price control agreed early after Ofgem judged its business plan for the eight year period showed sufficient value for consumers. Ofgem returned five out of the six companies’ plans (UK Power Networks, Northern Power Grid, SP Energy Networks, SSE Power Distribution and Electricity North West) because they failed to deliver good enough value for consumers. Since then, £2.1 billion has been cut from the plans, with companies identifying £700 million of these savings and Ofgem disallowing a further £1.4 billion following analysis and benchmarking of costs.

In addition to requiring efficient investment, Ofgem challenged the companies to improve customer service and take a more active role in helping vulnerable customers. Companies have responded well and plan to improve the help to vulnerable customers for example during power cuts. Ofgem’s annual customer satisfaction survey focuses companies’ attention on this important area and poor performers will face financial penalties. Ofgem has also sharpened targets to help new customers, such as businesses, new renewable generation (including community plans) and housing developments, get connected to the network faster.

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.

“Today’s announcement is all part of Ofgem’s consistent drive to get the best deal for consumers while maintaining a stable regulatory regime which attracts investment as cheaply as possible. Our approach has delivered over £80 billion of investment since 1990 which has seen reliability increase and power cuts fall by 30%. At the same time, total network costs are 17% below where they were 25 years ago and electricity distribution costs are 39% lower.

“During the course of the price control there is expected to be an increased take up of low carbon technologies including heat pumps, solar panels and small-scale renewable generation. Ofgem’s regulation focuses companies’ attention on connecting these low carbon technologies in a timely and cost effective way, using smart solutions where appropriate.”

Smart solutions use real time information about the network and automation technology to make more efficient use of existing infrastructure. They also allow active management of consumption and generation patterns. These solutions can reduce the need for investment to accommodate new connections and mean that the network is more flexible to the changing patterns of consumption and generation.

With smart meters being rolled out to all homes and small businesses by 2020 the network companies will have access to much more information about the performance of their network which they can use to improve performance and increase efficiency.

Today’s proposals are now under consultation for the next eight weeks. Ofgem will publish the final decisions in November 2014.

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Notes to editors

1. Electricity Distribution Price Control (RIIO-ED1)

View our consultation: RIIO-ED1: Draft determinations consultation for the slow-track electricity distribution companies

More information on how price controls work can be found in our factsheet: Price controls explained and, specific to the RIIO-ED1 price control, in our infographic: How Ofgem's proposed network price control (RIIO-ED1) will affect you.

There are 14 different distribution networks (DNOs) in Britain. These are regional monopolies and customers rely on regulation by Ofgem, rather than competition, to get the service they require at a reasonable price. In the price control review we set the total revenues that DNOs can collect from customers and we place strong incentives on these companies to innovate and find new ways to improve their efficiency and quality of service. The electricity distribution price control review (known as RIIO-ED1) sets the revenues for the eight-year price control period.

2. RIIO and next steps for RIIO-ED1

Revenue=Incentives+Innovation+Outputs (RIIO) is designed to incentivise companies to meet the unprecedented challenges they will face during the next decade: to find over £30 billion of investment needed to meet environmental targets and secure energy supplies, while delivering long-term value for money for consumers.

Ofgem requires companies to develop a well-justified business plan. Initial drafts were submitted in July last year, with the possibility for companies to get early approval. The potential to be agreed early also known as ‘fast-tracked’, drove all the DNOs to raise their standards with savings of £2 billion compared to initial forecasts in 2012. After a rigorous assessment process, Ofgem concluded that only Western Power Distribution (WPD)’s plan offered good value for consumers and it was fast-tracked in February 2014. We asked the remaining five network companies to submit their revised plans in March this year.

Today’s proposals are now under consultation for the next eight weeks. Ofgem will publish the final decisions in November 2014.

The current price control expires on 31 March 2015 and the RIIO-ED1 price control will run from 1 April 2015 - 2023.

3. Business plan comparisons

£M (2012-2013 PRICES) FIRST BUSINESS PLAN (NOV 2013) REVISED BUSINESS PLAN (MARCH 2014) OFGEM DRAFT DETERMINATION % DIFFERENCE
Electricity North West 1,900 1,877 1,794 -4.4%
Northern Powergrid 3,224 3,172 2,928 -7.7%
UK Power Networks 6,726 6,584 5,995 -8.9%
SP Energy Networks 3,960 3,491 3,206 -8.2%
Scottish and Southern Energy 3,720 3,635 3,398 -6.5%
Total 19,531 18,760 17,321 -7.7%

4. About Ofgem

Ofgem is the Office of the Gas and Electricity Markets, which supports the Gas and Electricity Markets Authority, the regulator of the gas and electricity industries in Great Britain. The Authority's functions are set out mainly in the Gas Act 1986, the Electricity Act 1989, the Competition Act 1998 and the Utilities Act 2000. In this note, the functions of the Authority under all the relevant Acts are, for simplicity, described as the functions of Ofgem.

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