Helen Poulter, IGov Team, 23rd January 2018
In June 2017 IGov reported on the RIIO ED1 price control. This was the first annual review by Ofgem of the RIIO ED1 price control – effected after the companies had been working to it for one year. The blog concluded that although there were minor improvements this new regulation strategy did not incentivise the DNO’s to do things differently.
In July 2017, a report by Citizens Advice highlighted the forecasted RoRE (return on regulatory equity) – the financial return achieved by investors during the price control period – was more than double that achieved by energy retailers. The report forecast there would be an average RoRE of 10%, which would mean an average profit margin of 19% across the six DNO’s. The Citizens Advice report concluded that the DNO’s would make profits of £7.5bn over the price control period.
In September 2017, ECIU released a report looking at the large profits being made by the DNO’s in the previous 2010-2015 price control – with rate of return of revenue in the range of 25%-39% per annum. Also in September 2017, Ofgem announced that (following a review of the previous price control) there would be a reduction in current DNO revenue allowances a total of around £200m – 0.02% of the total expected RIIO ED1 profits. Ofgem also stated that the DNOs would need to be ready for tougher price controls in the future.
A new report released last week from ECIU reviewed the actual annual returns reported for the period since RIIO came into effect (reviewed by Ofgem and the subject of our first blog) showed that the Citizens Advice report estimate was actually conservative – with the six DNO’s showing an rate of return on revenue of 30.4% giving an average RoRE of 13.5%. These figures show the same average as the previous price control. The report also noted that as the majority of the DNO’s are owned by non-UK companies so that profits would not be flowing back into the UK economy.
If the part of the purpose of RIIO is to (i) reduce the ability of the DNO’s to game the system – and (ii) to only enable fair profits, it has failed. It is essential for RIIO-2 we change the way that the DNO’s are incentivised, not only to achieve decarbonisation but also to achieve lower prices and bills for consumers. The Energy Policy Group comments to the Ofgem Open Letter on the RIIO-2 framework can be found here; and a deeper analysis of the Ofgem ED1 reviewcan be found here.
This blog was updated on 24/01/18
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