- Ofgem challenges 5 out of 6 electricity distribution companies to cut costs for consumers
- Western Power Distribution’s (WPD) business plan provides good value for consumers and its price control could be agreed early*
- Ofgem price regulation will see distribution costs cut 11.6% (around £11.30) for the nearly 8 million households in WPD’s areas from April 2015
- All companies responded well to Ofgem’s RIIO price controls which have driven over £2bn in savings so far. Companies challenged to deliver further cost reductions
Ofgem has today sent back plans from five of the six companies that own and operate Britain’s local electricity network, as they did not sufficiently demonstrate value for consumers. Western Power Distribution’s (WPD) business plans clearly demonstrate that they are good value for consumers and therefore are eligible to be fast-tracked by Ofgem.
Western Power Distribution, which serves customers in south Wales, the Midlands and the south west of England, is the only company that has achieved eligibility to have its price controls agreed early. WPD’s business plans, which cover the period from 1 April 2015 – 31 March 2023, include around £7bn of total expenditure of which around £3bn is for investment to upgrade and maintain WPD’s network. The distribution element of the electricity bill, which accounts for 19% of the average annual electricity bill, would be reduced for its customers by an average of 11.6% or around £11.30 in 2012/13 prices. *These numbers are based on the cost of equity allowance within WPD’s business plans. The actual return on equity to be applied is subject to our consideration of new information from the recent Competition Commission provisional determination on Northern Ireland Electricity. See Note 1 for more information.
Hannah Nixon, Senior Partner for Distribution said: “We understand that energy costs are a big concern for consumers and we set a high target for demonstrating value for money. We are pleased that nearly all companies have pledged to cut bills, but we feel that most companies can go further in cutting their costs and expect to see further improvements when they resubmit their plans in March.
“Western Power Distribution responded well to Ofgem’s challenge to demonstrate good value and drive improvements for consumers while reducing the distribution part of their bill. I’m very pleased that our new approach to price controls, RIIO, has produced a sea change in how companies approach price controls, with all companies producing a very high standard of business plan that have customers at their heart. WPD was particularly impressive and clearly demonstrated it delivered for consumers on all areas and this is the reason it is eligible for fast-tracking.”
Companies responded positively to Ofgem’s call to deliver investment efficiently, driven in part by the potential to be fast-tracked, with over £2 billion in cost reductions since their initial forecasts in 2012. It is estimated that during the price control total expenditure will be £27bn across all companies, of which around £13bn is for network investment specifically. All of the companies submitted a high standard of business plan and in some areas companies showed real innovation and willingness to push boundaries. For example, several companies set out comprehensive strategies on taking a more active role in helping consumers in vulnerable situations, working with other agencies such as the British Red Cross and National Energy Action.
The improved plans demonstrated that Ofgem’s RIIO price control has been successful in driving down costs, promoting innovation and stakeholder engagement. However, even with the reductions and good initiatives in the business plans, Ofgem believes there is scope for further improvement. The remaining companies will now submit revised plans in March, when we would expect costs to be reduced further.
Since privatisation, Ofgem’s price controls have delivered a 25% improvement in network reliability and seen the electricity distribution network grow by 10%. In RIIO-ED1 Ofgem is building on this good track record by ensuring efficient investment to maintain and upgrade the local grid and setting challenging targets which incentivise companies to deliver further improvements to benefit consumers. In addition, from the start of this price control in 2015, Ofgem is reducing the time at which companies need to pay customers for being off supply from 18 to 12 hours and ensuring payments rise according to inflation.
Notes to editors
1. Next Steps and Documents
Consultation on our methodology for assessing equity market returns
The Competition Commission published its provisional determination for Northern Ireland Electricity on 12 November 2013. We have identified a difference between the position adopted by the Competition Commission in this provisional determination and the methodology we have generally adopted, and signalled in our Strategy Decision, for assessing equity market returns. We use an assessment of equity market returns to set the return on equity for the companies, which, in conjunction with the return on debt, is used to set the allowed return that a Distribution Network Operator (DNO) can earn.
The Competition Commission, or its successor the Competition and Markets Authority, is the appeal body for our RIIO-ED1 settlements. We consider it is necessary for us to consult before we can reach a considered evaluation of the methodology we use to assess equity market returns. We will conduct the methodology consultation in parallel with this fast-track consultation. Should we conclude it is appropriate for us to adopt the Competition Commission’s position for estimating equity market returns, we would need to take this into account in our fast-tracking decision. In so doing, we would provide WPD with the opportunity to accept an adjusted return on equity as part of its fast-track settlement. We would calibrate this adjustment to reflect only the change in policy.
Non fast tracked
The non fast tracked companies will be required to submit revised plans by mid March 2014. Ofgem will consult on Draft Determinations for these companies in July 2014, followed by Final Determinations in November 2014.
The price control for all electricity distribution companies will come into effect on 1 April 2015.
More information on how price controls work can be found in our fact sheet, ‘Price Controls Explained’
2. Financial Parameters
|RIIO-ED1||Western Power Distribution’s business plan|
“Vanilla” weighted average cost of capital
|4.1% *based on projected return on debt for 2014/15|
Return on debt (real pre-tax)
|Indexed using RIIO 10-year simple trailing average (2.9% in WPD’s business plan)|
Return on equity
|6.7% dependent on outcome of Ofgem consultation on methodology for assessing equity market returns|
3. Bill impact
Network charges in each distribution area are paid for by the consumers living within that area. Around 19% of an annual electricity bill is made up of network distribution costs. This element of the bill varies by region as the charges reflect costs incurred for transporting energy to different areas of the country.
Breakdown of the total distribution cost by area for the RIIO-ED1 period, according to WPD’s business plans are in the table below. Figures have been rounded to the nearest pound.
Bill impact in WPD’s business plans for its distribution areas
|Impact on the distribution charges included in domestic bills (as set out in WPD’s plans)|
|In 2015/16 a decrease of £6 followed by an increase of around 80p per year|
|In 2015/16 a decrease of £5.50 followed by an increase of around 80p per year|
|In 2015/16 a decrease of £26 followed by an increase of around £1 per year|
|In 2015/16 a decrease of £18.80 followed by an increase of around £1.10 per year|
Average across the 4 regions
|In 2015/16 a decrease of £11.30 followed by an increase of around 90p per year|
Note: All figures exclude the impact of Retail Prices Index (RPI) inflation, which DNOs are allowed to reclaim in their charges.
4. Distribution charges
There are 14 different distribution networks (DNOs) in Britain. A map of the areas they manage can be found on our website.
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 RIIO-ED1 price control review sets the revenues for the eight-year RIIO-ED1 price control period. The current price control expires on 31 March 2015 and the RIIO-ED1 price control will run from 1 April 2015 - 2023. During this period companies will continue to experience strong incentives to find more efficient ways of delivering their outputs – and the benefits will be shared with consumers throughout the period.
Western Power Distribution owns and operates the local electricity distribution network in south Wales, the Midlands and the South West of England.
5. 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 powers and duties are largely provided for in statute, principally the Gas Act 1986, the Electricity Act 1989, the Utilities Act 2000, the Competition Act 1998, the Enterprise Act 2002, the Energy Act 2004 as well as arising from directly effective European Community legislation.
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