Ofgem has warned energy network operators to brace themselves for a tougher round of price controls from 2021.
The regulator believes there is “strong evidence” that investors are “increasingly willing” to accept lower returns from longer term investments in regulated infrastructure.
Price controls are needed as these networks are monopolies and therefore there is no realistic way of introducing competition across the sector.
They are a method of setting the amount of money that can be earned by the network companies over a length of a price control.
The new rules will affect the price householders are charged by the companies that run Britain’s energy networks – as the costs are passed onto consumers and represent around a quarter of bills.
Other elements of the price control include a range of financial incentives that reward improvement and penalise poor performance in customer service, connections, reliability and other areas.
The news comes as Citizens Advice claims network operators are making “eye watering” profits at the expense of households.
However, Ofgem said it will ensure returns in the next price controls will allow companies to finance their investments efficiently.
Jonathan Brearley, Senior Partner, Networks at Ofgem added: “Ofgem is working to ensure that customers pay no more than they need to for energy networks while still benefitting from improvements in reliability and service. that is why in launching the new round of price controls, we are looking at what lessons we can learn to improve further the RIIO framework for consumers.
“Our stable regulatory regime appeals to investors. We believe current market evidence suggests that they may be willing to accept lower returns for regulated assets. Setting tougher controls will ensure that Britain’s energy networks deliver even better value for customers.”
The regulator believes by 2020, the price controls will have enabled around £80 billion of investment in transmission and distribution infrastructure since privatisation, while reducing network costs by 17% during the same period.