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
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.