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Ofgem Challenges Electricity Distribution Companies to Cut Costs

22 Nov 2013

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.

Story appears courtesy of Ofgem