UK energy networks are making too much money due to key errors made by Ofgem in setting price controls, according to Citizens Advice.
The charity forecasts that “unjustified” profits will hit £7.5bn over the current eight-year price control, which for gas runs to 2021 and for electricity to 2023. It has called for a rebate for energy customers.
Citizens Advice claims Ofgem made three costly incorrect assumptions when setting the current price controls: Overestimating business risk for investors and overestimating future interest rates will cost consumers £6.4bn, it forecasts.
Citizens Advice believes a further £1.1bn will added to bills because network companies are encouraged to inflate initial cost estimates to then claim efficiency incentives that allow them to keep underspend on projects as profit.
“Energy network firms are enjoying a multi-billion pound windfall at the expense of consumers,” said Gillian Guy, chief executive of Citizens Advice.
“Decisions made by Ofgem have allowed gas and electricity network companies to make sky-high profits that we’ve found are not justified by their performance.
“It is consumers who have to pay the £7.5bn price for the regulator’s errors of judgment. We think it is right that energy network companies return this money to consumers through a rebate.”
If no rebate is forthcoming, said Guy, “then the government should consider stepping in.”
As the report was launched, Ofgem published an open letter around outlining its thoughts on the next price control period. It said networks should prepare for “tougher” price controls with “lower returns” for investors.