Stay informed with free updates
Simply sign up to the UK energy myFT Digest — delivered directly to your inbox.
The owners of Britain’s gas and electricity networks have made billions of pounds in excess returns as a result of a “policy failure” by regulator Ofgem, according to consumer watchdog Citizens Advice.
The companies secured a windfall of almost £4bn between 2021-2024 because Ofgem’s formula for setting their returns assumed they were paying more for their borrowing than they actually were, the watchdog found.
The loophole means the companies in effect benefited from the inflation that has pushed many households into financial difficulty over the past few years, Citizens Advice said in a report published on Thursday.
Household energy bill arrears hit a record £2.9bn in the third quarter of 2024, according to the latest Ofgem figures.
Dame Clare Moriarty, chief executive of Citizens Advice, said energy network companies, which provide pipes and cables to people’s homes, were making “astronomical profits” and urged them to do more to help struggling households.
The report comes after analysts forecast on Tuesday that the price cap on energy bills is set to rise by 5 per cent in April, because of a rebound in wholesale energy prices.
Energy bills have fallen since the energy crisis in the run-up to and aftermath of Russia’s full-scale invasion of Ukraine, but are still well above pre-crisis averages.
Bills include a portion to fund gas and electricity network companies, such as FTSE 100 companies National Grid, Berkshire Hathaway’s Northern Powergrid, and Macquarie-backed Cadent.
Ofgem regulates how much the network owners can spend and charge consumers to cover their costs and make a return. For the 2021-2028 period, Ofgem’s formula to work this out assumed their borrowing costs were linked to inflation, which leapt in 2021-2022 driven by high energy costs.
In reality, their borrowing costs were often flat, meaning Ofgem allowed for more than they spent, leading to a £3.9bn increase in their “regulated asset value” — amounting to a “windfall” according to Citizens Advice.
Ultimately, this increase in RAV is paid for by consumers to cover the depreciation of the asset over their lifetime. Ofgem said this amounted to “a few pounds a year on consumer bills”.
Companies can also use the higher RAV to help them finance their operations, meaning an immediate benefit. “It is clear that this outperformance represents a policy failure,” Citizens Advice said.
Its analysis found that Northern Gas Networks had the highest rate of return on equity of the gas distribution networks, at 13.3 per cent across the three-year period. SSEN had the highest of the electricity distribution networks between 2023 and 2024, at 16 per cent.
Ofgem has moved to close the loophole, saying last week it would amend the way it calculates debt allowances for energy companies for the next price control period, starting in 2028.
However, Citizens Advice called on network owners to “redistribute windfall gains to support consumers” by helping those struggling to pay their energy bills.
Simon Francis of the End Fuel Poverty Coalition added: “These firms have a virtual monopoly over vital grid infrastructure and have consumers over a barrel. That’s why it is so important for the regulator to do its job.”
An Ofgem spokesperson said protecting consumers was its “top priority” and the issue had arisen because of “extraordinary levels of inflation”.
They added: “We decided to adjust our price controls going forward so that such inflation shocks do not lead to any excessive financial overperformance.
“We have also made clear that network companies can and should use the temporary effect of higher inflation to strengthen their balance sheets to benefit consumers and support those who need it most.”
A spokesman for the Energy Networks Association, which represents electricity networks, said: “Citizens Advice’s analysis is overly simplistic and looks at a narrow two-year period, ignoring the longer investment timeline and the balance of returns across a five-year period.
“Electricity networks are bringing in private investment of more than £100bn between 2021 and 2031, investing in our grid to promote growth in our economy. It’s crucial to keep the regulatory environment stable during this time.”
A spokesman for Future Energy Networks said: “As regulated businesses, GB’s network operators’ returns are consistent with a methodology set by Ofgem. The returns set by the regulator allow operators to mobilise billions of pounds in expenditure and investment into GB’s energy infrastructure.”
