Domestic energy bills are set to fall after regulators announced that consumers should pay less towards networks such as National Grid.
The energy regulator has provided some relief from rising energy costs by announcing measures that will reduce bills by about £45 a year from 2021.
Ofgem said it would “drive a hard bargain” with companies that run the wires and pipes that supply the UK’s electricity and gas, halving the level of returns they can make.
Consumer groups welcomed the move, saying networks had “had it too good for too long” and urging the regulator to “hold its nerve” against the inevitable industry pushback.
National Grid shares fell by nearly four per cent and the company said it was disappointed by the decision, which it believes does not reflect the “level of risk borne by transmission networks”.
The company runs the national electricity grid and accounts for about 3% of a typical bill.
The body that represents power and gas grid firms, the Energy Networks Association, warned the proposals would jeopardise the investment needed for the switch to a greener and smarter energy system.
Big six energy firm SSE saw its share price down more than 2%, and its network arm said it was disappointed and the decision ran contrary to independent analysis.
As regulated monopolies, National Grid and other network companies have price controls set by Ofgem that dictate how much they can spend and profit.
The current limits have been criticised for allowing firms to earn “sky high” profits totalling £7.5 billion.
Ofgem wants to set the returns at 4% – about 50% lower than under the previous price controls – to save £30 a year.
The other £15 would come from November proposals to reform network charges.
Ofgem’s plans for revising the energy system would also help customers benefit from new technology such as electric vehicles and renewables.
The regulator also wants to offer incentives for electric vehicle owners to be able to charge their cars outside the evening peak time - potentially with a smart charger while parked at work.
Jonathan Brearley, Ofgem executive director for systems and networks, told BBC Radio 4’s Today programme the plans were important because “our energy system is changing”.
He added: “People in the future may well want to charge their electric cars and install solar panels on their houses and communities may even want to build their own wind farms. What we need is a system that supports this at least possible cost.
“Our job is to look after the long-term interests of consumers and strike a fair deal between their shareholders and those consumers.
“For example, if we have a system where the way we could connect electric cars is more flexible - that allows us to move demand, that means we have to build fewer wires, which means a lower investment overall.”
National Grid said it was “disappointed” with the proposals.
“In order to deliver the major capital programme required across our networks in a rapidly-changing market, we need to ensure the regulatory framework also provides for fair returns to shareholders and enables us to continue to deliver world-class networks for consumers.”
However, Citizens Advice was much happier with the plans.
Jamie Stewart, Energy Policy Manager at Citizens Advice Scotland said: “We welcome Ofgem’s plans to reduce the costs of energy bills for consumers. In Scotland 25% of households are in fuel poverty and any action taken to reduce the costs that people pay for energy networks is a step in the right direction.
“With more electric vehicles, renewable generation and smart in-home technology the energy system is changing. We hope that Ofgem’s proposals can help ensure that vulnerable households and those who may struggle to take advantage of the changes are not left behind.”
The move today should save consumers a collective £6.5bn over the next period of controls, which start in 2021.
Ofgem also announced a shakeup of how access to energy grids is charged, which will see the nearly 1m households that have fitted solar panels facing higher energy bills as a result.
According to Ofgem figures, the average energy bill on a default tariff – the most common bill – is £1,221.
Jonathan Brearley, the regulator’s executive director for systems and networks, said: “Our proposals for the new network price controls and charging reforms will help build a lower cost, fairer energy system which is fit for this smarter, cleaner future.”
The level that Ofgem has set the returns for network firms is at the bottom of a range it published in March. The regulator defended the level, saying that real world examples showed that companies could operate on such returns and investment would not be threatened.
Gillian Guy, the Citizens Advice chief executive, said: “Ofgem’s commitment to a tougher price control should curb the excess profits networks have been allowed to make. This is good news for people as this should result in lower bills.”
Industry watchers said the step could see calls for money to be returned to consumers for historical overcharging.
Jonathan Marshall of the ECIU thinktank said: “By effectively admitting that network companies’ revenues have been too high for years, it wouldn’t be surprising to see more calls for money to be returned to customers.”
Analysts said the move was “broadly negative” for network firms because of the lower-than-expected limit on returns.
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