Ofgem price forecasts cost energy customers £7.5bn, says Citizens Advice

Energy customers are subsidising £7.5 billion in "unjustified" profits made by gas and electricity network companies because of errors in judgment made by regulator Ofgem, a charity has claimed.

Citizens Advice has called for energy network companies to return the money to consumers in the form of a rebate through lower bills.

The charity has estimated that price control decisions by Ofgem are allowing the businesses responsible for the UK's energy networks to make billions in returns on their capital investments.

Consumers pay for energy networks through gas and electricity bills and Ofgem is responsible for restricting this amount, which it does partly by forecasting the cost of building and maintaining energy networks while estimating the level of business risk for investors.

The Citizens Advice report said Ofgem forecasts that network companies will currently earn an average of 10% return for their investors, which is an average 19% profit margin - compared with the 4% margin made by the largest energy suppliers.

But the charity said Ofgem had overestimated the business risk for investors in energy networks, estimating them as 90% to 100% as risky as the average company, when market data suggested a more reasonable figure would be 60%, at a cost of £3 billion to consumers.

The regulator also assumed interest rates and returns for government bonds would be higher than they were, costing bill payers £3.4 billion, and rewarded companies that inflated their initial estimates for costs by interpreting this as efficiency, at a further cost to consumers of £1.1 billion.

Citizens Advice said Ofgem should take a similar option to water regulator Ofwat, which worked with water companies to return £435 million of excess profits to consumers out of a windfall of around £1.2 billion over the course of its price controls.

Citizens Advice chief executive Gillian Guy said: "Energy network firms are enjoying a multibillion-pound windfall at the expense of consumers.

"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.

"Through their energy bills, it is consumers who have to pay the £7.5 billion 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 energy network companies fail to return these unjustified profits to the consumers that paid for them then the Government should consider stepping in."

Ofgem said network energy costs make up 24% of the average bill and have fallen by 17% over the last 30 years.

Ofgem chief executive Dermot Nolan said: "Ofgem's regulation of Britain's energy networks is cutting costs, increasing reliability to record levels and improving customer satisfaction for consumers.

"We are constantly striving to ensure that customers pay no more than they need to for networks. Ofgem has already cut costs to consumers by 6% in the current price control and secured a rebate of over £4.5 billion from network companies and is engaging with the industry to deliver further savings.

"Today we are setting out our plans for the next price control and along with other utility regulators are signalling that the next price control will be tougher for investors. While we don't agree with its modelling and the figures it has produced, the Citizens Advice report raises some important issues about network regulation which will be addressed in the next control."

The Energy Networks Association said: "The UK's energy networks have a strong track record of consistently delivering for our households, businesses and communities. Costs are down by 17% in real terms since privatisation and customer satisfaction levels are consistently over 80%, a rate which is higher than those of many high street retailers.

"Our energy networks are among the most reliable and lowest cost in the world and their performance has never been better. In the next six years, energy network companies are forecast to deliver £45 billion of investment in the UK economy.

"We don't agree with the modelling used (in the Citizens Advice report), and to produce an excess profit forecast of £7.5 billion by 2023 while stating that long-term forecasting is an impossible task simply doesn't make sense.

"We feel it's important that both industry and consumer groups alike contribute to the public debate on energy in a well-thought through approach that is fact-based and on sound policy analysis."