Why and how we use network price controls

Energy networks are privately owned and funded through energy bills. They are also regional monopolies – you can’t choose the local network you use, as only one usually runs the pipes and wires in an area of Great Britain. 

As a result, there’s no competition between companies to drive better service or more investment in the energy networks. This is why they need to be regulated. And it is why Ofgem sets network price controls.  

By contrast, with the exception of the energy price caps on default and prepayment meter tariffs, we don’t regulate the prices charged by generators or suppliers. This is because they are part of a competitive market: you can choose a supplier and suppliers can choose where they buy their energy.

‘RIIO’ is the name for our network price controls. It stands for Revenue=Incentives+Innovation+Outputs.

Setting price controls

One of the ways we use price controls to protect consumers is by carefully limiting how much money network companies can charge. We do this to prevent overcharging and to make sure the networks provide good services. We need to balance our price controls with letting companies charge enough to cover their costs and get a reasonable return on the money they invest.

We also set incentives in the price controls. This is to encourage companies to innovate so they become more efficient to cut their financing and running costs and invest intelligently to meet our future energy needs. We set targets too, covering customer service, network reliability and environmental performance.

How much money we allow companies depends on the investment we think they need to make, the cost of running their network and their performance on quality of service.

We have developed one of the safest and most reliable energy systems in the world through our price control regulations. Power cuts are now half the EU average and customer satisfaction with distribution networks is at record highs.

We have also created a stable and predictable regulatory environment which gives confidence to investors from around the world to put their money into network companies in Great Britain. The risk of investment in network companies is relatively low when compared to that of the wider market because of our price control regime. 

Network costs today

In 2018-19, around a fifth (£281) of an average household energy bill (£1,184 - dual fuel, typical consumption) went towards running and maintaining the network.

View data on network cost trends

Chart

Javascript is required to render chart Large suppliers: Domestic dual fuel bill breakdown over time.

Source: Ofgem analysis of companies’ Consolidated Segmental Statements.

Information correct as of: August 2019

This chart provides an estimate of the breakdown of a dual fuel bill over time for an average domestic customer of the large suppliers.  It is based on information reported by the large suppliers in their annual Consolidated Segmental Statements. For more information, please see our page Understanding the profits of the large energy suppliers. Earnings Before Interest and Tax (EBIT) – which we also refer to as suppliers’ pre-tax margins – are calculated as revenue minus costs, before accounting for taxes and interest.

Policy Areas:

  • Electricity - retail markets
  • Gas - retail markets

Data Table

Large suppliers: Domestic dual fuel bill breakdown over time
Wholesale costsDirect costsNetwork costsEnvironmental/social costsOther direct costsOperating costsEBITVATBill
20096212901328521095
201058828016035531116
201153728715230501057
201261234716153591232
2013628276109016349611286
2014532278100516651571190
201550627986718249551165
2016425292911319354531123
20174042841081420549531117
20184452811341621733561184

More information

Domestic dual fuel bill breakdown over time: At-a-glance summary

Between 2009 and 2018, the average domestic dual fuel bill has fluctuated, reaching a peak of £1,286 in 2013. In 2018 it increased to £1,184 from £1,117 in 2017, mainly as a result of an increase in wholesale and environmental/social costs.

The large suppliers’ financial statements have shown a marked difference in outturns for gas and electricity. Despite the fall in revenues, aggregate pre-tax profits from the supply of gas increased year-on-year, while for electricity they fell significantly.

Relevance and further information

This indicator helps to explain the costs making up an average dual fuel bill and show the factors influencing total bills in a given year. The costs that make up a bill are wholesale costs, network costs, environmental and social obligation costs, operating costs (including depreciation and amortisation), supplier pre-tax margin and VAT.

Methodology

To estimate the breakdown of an average gas and electricity bill, we took the sum of each category of costs and pre-tax supply margins as reported by the suppliers for each fuel and then divided by the total number of customers for that fuel. We then added VAT at 5% and summed the implied bill components for gas and electricity together to derive an estimate of the overall costs making up a dual fuel bill.

Note that because it is based on the total costs and customer numbers reported by suppliers irrespective of their tariff type, the bill breakdown for gas will reflect a mixture of the costs of serving gas to dual fuel and single fuel customers – and the same also applies to electricity. As such, the dual fuel breakdown should be considered an approximation in that it will reflect a combination of the costs incurred in serving gas and electricity to both dual fuel and single fuel customers (which may differ if, for example, electricity-only customers consume more electricity than those customers that are also supplied with gas).

The data presented is based on the latest available Consolidated Segmental Statements. It may differ from the data that can be found in the supplier’s externally published Consolidated Segmental Statements. This is because we have made some adjustments to the way in which exceptional items are reported among suppliers to improve comparability.

Figures relate to the suppliers’ financial years. Five of the companies (British Gas, EDF, E.ON, npower and ScottishPower) have financial years ending in December, whereas SSE’s financial year runs from April to March.

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Chart

Javascript is required to render chart Estimated network costs per domestic customer (GB average).

Source: Ofgem analysis of network companies’ cost information .

Information correct as of: March 2019

This chart shows our estimate of trends in the annual cost of the different components of network charges for a domestic customer with a fixed amount of consumption. Balancing Services Use of System charges are not included in the chart.

Click the ‘more information’ tab above for a summary of the latest trends, an explanation of network costs and for further detail on how we calculate the costs.

Policy Areas:

  • Electricity - distribution
  • Electricity - transmission
  • Gas - distribution
  • Gas - transmission

Data Table

Estimated network costs per domestic customer (GB average)
Annualised network costsElectricity (transmission)Electricity (distribution)Gas (transmission)Gas (distribution)
Apr-1532969120
May-1532969120
Jun-1532969120
Jul-1532969120
Aug-1532969120
Sep-1532969120
Oct-1532969120
Nov-1532969120
Dec-1532969120
Jan-1632969120
Feb-1632969120
Mar-1632969120
Apr-16391019120
May-16391019120
Jun-16391019120
Jul-16391019120
Aug-16391019120
Sep-16391019120
Oct-16391019120
Nov-16391019120
Dec-16391019120
Jan-17391019120
Feb-17391019120
Mar-17391019120
Apr-1737909114
May-1737909114
Jun-1737909114
Jul-1737909114
Aug-1737909114
Sep-1737909114
Oct-1737909114
Nov-1737909114
Dec-1737909114
Jan-1837909114
Feb-1837909114
Mar-1837909114
Apr-1835859113
May-1835859113
Jun-1835859113
Jul-1835859113
Aug-1835859113
Sep-1835859113
Oct-1835859113
Nov-1835859113
Dec-1835859113
Jan-1935859113
Feb-1935859113
Mar-1935859113
Apr-19358710114
May-19358710114
Jun-19358710114
Jul-19358710114
Aug-19358710114
Sep-19358710114
Oct-19358710114
Nov-19358710114
Dec-19358710114
Jan-20358710114
Feb-20358710114
Mar-20358710114

More information

Estimated network costs per domestic customer: At-a-glance summary

  • The majority of network costs for a domestic customer are for the use of the gas and electricity distribution networks.
  • For a household whose consumption does not change, on average across GB network costs in 2019/20 will increase for gas distribution, electricity distribution, and gas transmission. For electricity transmission, costs compared to the previous charging year will rise broadly in line with inflation.
  • Actual costs will vary depending on where a customer lives, how much energy they use, and what type of meter they have.

What are network costs?

Suppliers are charged for the costs to build, maintain, improve and operate the energy networks. Most of the networks are owned by monopoly businesses. Therefore through regulation, we limit the revenue that these companies can recover from customer charges to run the networks.

The network charges paid by suppliers vary depending on where their customers live, what type of meter they have, when energy is used and how much energy they use. In total, these charges accounted for approximately a fifth of a dual fuel bill in 2019.

Different charges apply for the high voltage/pressure transmission networks (which take electricity and gas around Great Britain) and the lower voltage/pressure distribution networks, which connect customers to the overall networks.

As well as the charges to suppliers that are considered here, electricity generators and gas producers are also charged for their use of the networks. It is important to note that trends in network costs will therefore also affect supplier costs indirectly through wholesale prices.

Methodology

  • Network costs are calculated by combining charging information published by the network companies with assumptions about consumption and losses for domestic customers.
  • All costs are calculated for medium annual typical domestic consumption values of 12,000kWh for gas and 3,100kWh of electricity, which is held fixed across the charging years. The actual network costs a supplier incurs to serve a customer will depend on how much energy is used, the timing of its use as well as the charges that apply from one year to the next.
  • The costs shown are GB averages, calculated by taking a simple unweighted average of the tariffs that apply in different regions of the country.
  • The costs are expressed in nominal money (i.e. the amount of money a customer ‘pays over the counter’), rather than in real terms (i.e. after adjusting for inflation). For electricity, the costs reported are for a standard unrestricted meter.
  • Balancing Services Use of System charges are not included on the chart. These charges cover the cost of services used to balance the electricity system and internal system operator operating costs.

The methodology we use to calculate these charges is consistent with our methodology for the Default Tariff Cap. Further details on the calculations are available in our Default Tariff Cap publications.

Further information

You can find further information on the different components making up an energy bill at Understand your gas and electricity bill.

To see how the network fits together, visit The energy network: How it works for you.

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Chart

Javascript is required to render chart Breakdown of a dual fuel bill.

Source: Companies’ consolidated segmental statements.

Information correct as of: August 2019

This chart shows an estimate of the different costs that make up an average dual fuel bill for a typical domestic customer of the six large suppliers. It is based on reported data from the six large suppliers’ annual Consolidated Segmental Statements.

Click the ‘more information’ tab above for information on our methodology.

For information on supplier prices and profits, please see our page Understanding the profits of the large energy suppliers.

Policy Areas:

  • Electricity - retail markets
  • Gas - retail markets

Data Table

Breakdown of a dual fuel bill
Annual costPercentage
Wholesale costs37.59%
Network costs23.77%
Operating costs18.35%
Environmental and social obligation costs11.34%
VAT4.76%
Supplier pre-tax margin2.82%
Other direct costs1.37%

More Information

Methodology

To estimate the breakdown of an average gas and electricity bill, we:

  1. Took the sum of each category of cost (e.g. wholesale, network etc) and the pre-tax supply margin reported by the suppliers for gas. Did the same for electricity.
  2. Divided the gas sum by the total number of customers and added VAT at 5%. Did the same for electricity.
  3. Added together the resulting two figures to get a combined estimate of the overall cost of a dual fuel bill.

Please note that chart calculations are drawn from suppliers’ reported total costs and total customer numbers, irrespective of tariff type. They will therefore reflect a mixture of the costs to supply dual fuel and single fuel customers. As such, the dual fuel breakdown is an approximation – values may differ, for example, if electricity-only customers use more electricity than those customers who are also supplied with gas.

The data presented is based on the latest available Consolidated Segmental Statements (CSS). It may differ from the data in the suppliers externally published CSS. This is because we have made some adjustments to the way exceptional items are reported to improve comparability.

Figures relate to the suppliers’ financial years. Five of the companies (British Gas, EDF, E.ON, npower and ScottishPower) have financial years ending in December, whereas SSE’s financial year runs from April to March. 

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Chart

Javascript is required to render chart Breakdown of an electricity bill.

Source: Companies’ consolidated segmental statements.

Information correct as of: August 2019

This chart shows an estimate of the different costs that make up an average electricity bill for a typical domestic customer of the six large suppliers. It is based on reported data from the six large suppliers’ annual Consolidated Segmental Statements.

Click the ‘more information’ tab above for information on our methodology.

For information on supplier prices and profits, please see our page Understanding the profits of the large energy suppliers.

Policy Areas:

  • Electricity - retail markets

Data Table

Breakdown of an electricity bill
Annual costPercentage
Wholesale costs32.32%
Network costs23.15%
Operating costs17.34%
Environmental and social obligation costs20.44%
VAT4.76%
Supplier pre-tax margin0.73%
Other direct costs1.25%

More Information

Methodology

To estimate the breakdown of an average electricity bill, we:

  1. Took the sum of each category of cost (e.g. wholesale, network etc) and the pre-tax supply margin reported by the suppliers for electricity.
  2. Divided the electricity sum by the total number of customers and added VAT at 5%.

Please note that chart calculations are drawn from suppliers’ reported total costs and total customer numbers, irrespective of tariff type. The chart will therefore reflect a mixture of the costs to supply dual fuel and single fuel customers. As such, the bill breakdown is an approximation – values may differ, for example, if electricity-only customers use more electricity than those customers who are also supplied with gas.

The data presented is based on the latest available Consolidated Segmental Statements (CSS). It may differ from the data in the suppliers externally published CSS. This is because we have made some adjustments to the way exceptional items are reported to improve comparability.

Figures relate to the suppliers’ financial years. Five of the companies (British Gas, EDF, E.ON, npower and ScottishPower) have financial years ending in December, whereas SSE’s financial year runs from April to March. 

close

Chart

Javascript is required to render chart Breakdown of a gas bill.

Source: Companies’ consolidated segmental statements.

Information correct as of: August 2019

This chart shows an estimate of the different costs that make up an average gas bill for a typical domestic customer of the six large suppliers. It is based on reported data from the six large suppliers’ annual Consolidated Segmental Statements.

Click the ‘more information’ tab above for information on our methodology.

For information on supplier prices and profits, please see our page Understanding the profits of the large energy suppliers.

Policy Areas:

  • Electricity - retail markets
  • Gas - retail markets

Data Table

Breakdown of a gas bill
Annual costPercentage
Wholesale costs43.22%
Networks24.44%
Operating costs19.43%
Environmental and social obligation costs1.60%
VAT4.76%
Supplier pre-tax margin5.05%
Other direct costs1.51%

More information

Methodology

To estimate the breakdown of an average gas bill, we:

  1. Took the sum of each category of cost (e.g. wholesale, network etc) and the pre-tax supply margin reported by the suppliers for gas.
  2. Divided the gas sum by the total number of customers and added VAT at 5%.

Please note that chart calculations are drawn from suppliers’ reported total costs and total customer numbers, irrespective of tariff type. The chart will therefore reflect a mixture of the costs to supply dual fuel and single fuel customers. As such, the bill breakdown is an approximation – values may differ, for example, if gas-only customers use more gas than those customers who are also supplied with electricity.

The data presented is based on the latest available Consolidated Segmental Statements (CSS). It may differ from the data in the suppliers externally published CSS. This is because we have made some adjustments to the way exceptional items are reported to improve comparability.

Figures relate to the suppliers’ financial years. Five of the companies (British Gas, EDF, E.ON, npower and ScottishPower) have financial years ending in December, whereas SSE’s financial year runs from April to March. 

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Network costs vary, reflecting changes in energy use and how much it costs to transport gas or electricity to the region you are in.

View more energy network data on the Ofgem Data Portal

Network costs tomorrow

Much of today’s network was built in the 1950s and 1960s. Government targets to cut greenhouse gas emissions to net-zero by 2050 and the rise in renewables in place of polluting fuels like natural gas, coal and petrol mean big changes are needed. 

Significant progress has already been made. Almost half of our electricity came from renewable or low-carbon sources last year. But emissions from our gas-reliant heating network and petrol-reliant transport network are not really falling. In fact, home heating alone makes up around 18% of current GB emissions. 

We need to upgrade the energy system so it is smarter and more flexible, and helps society to reduce these emissions.  

This means rapidly finding alternatives to gas heating. For example, by heating our buildings through hydrogen, heat pumps or electric heating. This also means putting an infrastructure in place to power millions of electric vehicles. The Government is currently creating national strategies to do this.

It also means rearranging our entire energy grid, to make sure it can cope with a hugely diverse, dispersed and intermittent mix of energy sources – from local wind-turbines and solar panels on household roofs to wave power, offshore wind farms and nuclear power stations dotted around the coasts. The system operator, National Grid, has committed to running a net-zero electricity system by 2026.

The networks play a vital role in the energy system. As this role grows, so does the need to make sure that consumers benefit from high levels of investment, innovation and reliability at the lowest cost. 

So, from 2021, we intend to make the companies who operate the networks cut right down on their running and financing costs while setting them tougher targets for customer service, safety, reliability and going further and faster on protecting the environment. The cuts we are proposing will help to keep network charges on bills affordable as investment rises later in the decade to help fight climate change.  

Our analysis shows that network companies can operate to a higher standard while lowering costs and investors are willing accept much lower returns on their investment than they get currently. This is because networks companies are stable and low-risk businesses. In short, we want less of consumers’ money going towards company profits and more towards building a better, greener network for the future. 

On 9 July we set out our detailed proposals for the five-year price controls that will power-forward these changes. Subject to consultation, we’ll make our final determinations in December 2020 and they will take effect on 1 April 2021.

More

What is the energy network and who runs it?

Data: What have the networks delivered?