UK households have been overcharged on energy bills for seven years, says watchdog

Customers have overpaid by £800 million because Ofgem was not tough enough on energy network companies

UK households have been overpaying on their electricity for the past seven years because the regulator has allowed electricity companies to make bigger than expected profits, the government spending watchdog says.

A report from the National Audit Office (NAO) published today has found that British homes and businesses have overpaid by at least £800 million over the last seven years.

It says that while the electricity network companies have provided a good service, the cost to consumers has been greater than it should have been.

The NAO says that the energy regulator Ofgem allowed some companies to set performance targets too low and cost budgets too high.

The regulator also overestimated how much money shareholders would need to incentivise them to invest in network companies.

This means that around £130 a year of a typical household’s annual electricity bill goes towards the running and maintaining of the networks.

Gareth Davies, the head of the NAO, says: “Ofgem’s regulation of electricity networks has delivered good service performance but higher than necessary costs for consumers.

“Its approach to price controls used insufficiently demanding targets and the eight-year price control period meant a longer wait before these targets could be reset.”   

Price controls

Ofgem introduced a price control framework known as RIIO in 2013 to ensure consumers are provided with a reliable service and not overcharged.

Under the current spending rules, networks are given an allowance to run and invest in their systems. If they spend less, they can keep half and return half to their customers.

On average, networks expect to spend 3% less than their allowance until RIIO-1 ends in 2021.

One company, National Grid Energy Transmission, is forecasting an underspend of 22%.

The NAO says that since this was introduced the electricity networks have seen returns of 9%, around 4% higher than the average UK company. Of this, 1.5% came from rewards for exceeding performance targets.

The NAO says targets for this scheme were fixed too far in advance, meaning networks were already exceeding their targets before RIIO-1 started.

It estimates that this has cost consumers at least £800 million.

Ofgem says that it is cracking down on network profits with the next round of price controls in 2021.

Akshay Kaul, Ofgem’s director of network price controls, says: “We acknowledge that the overall costs to consumers to date have turned out to be higher than they needed to be.

“That’s why our tough new round of price controls will lower returns to save consumers money, whilst pushing companies to go further on decarbonisation and ensuring we retain one of the world’s most reliable energy systems.” 

Citizens Advice estimated in 2017 that gas and electricity networks have overcharged consumers by £7.5 billion.

Gillian Guy, chief executive of Citizens Advice, says the report is further evidence that energy networks have enjoyed a major windfall at the expense of consumers.

She says: “Ofgem has made good progress towards a tougher settlement next time around. The regulator must hold its nerve, resist the efforts of networks to water down its proposals and deliver a price control that works for consumers.”