Britain’s electricity distribution companies face potential financial penalties adding up to almost £14m unless they improve the service for customers who request new connections, Ofgem has warned.
The energy market regulator believes distribution network companies — which own and operate the local cables that deliver electricity from the national network into homes and businesses — are guilty of a number of failings, including poor explanation of the costs of new connections and how any work is progressing.
New businesses and housing developers are the major customers for new connections but, increasingly, small power generators, such as small wind or solar farms or factories that generate their own electricity, are connecting to distribution networks.
This trend is expected to accelerate as Britain’s energy market moves away from the model of large power stations towards more renewables, local projects and smaller plants that can easily be switched on and off according to demand.
UK Power Networks, which owns and maintains electricity cables across London and is owned by Hong Kong billionaire Li Ka-shing’s Cheung Kong group, could face the biggest penalty of £4.62m. This is followed by SSE and Scottish Power, which are facing penalties of £2.9m and £2.58m respectively, which would be delivered via cuts in their revenue.
The Energy Networks Association, a trade body that responded on behalf of the companies, said that last year, distribution network companies “delivered a reduction in the length of time to connect customers, accommodating rapidly increasing demand from renewable generators”. They were also “fast tracking connections for small scale storage providers” the ENA said.
“Where the consultation highlights specific areas to improve, [distribution network companies] will work with Ofgem and stakeholders to ensure they continue to meet the needs of their customers.”
The regulator is allowing time for the six companies that own the UK’s 14 electricity distribution networks to respond, before a final decision by the end of November. Each of the six faces a potential penalty.
Ofgem recently warned investors in electricity and gas networks to prepare for much tougher regulation next decade, following a damning report from the charity Citizens Advice, which claimed network companies were making “eye-watering” profits at the expense of households.
Network companies are in effect monopolies and Ofgem evaluates what their costs are likely to be over an eight-year “price control” period.
However, Citizens Advice claims calculations made for the current period were far too “generous” and work “considerably in networks’ financial favour”, allowing them to make “unjustified” profits. Network costs are ultimately passed on to energy bill payers.
New price control periods will come into force in 2021 and 2023.
While Ofgem has refuted some of the analysis from Citizens Advice, Dermot Nolan, chief executive of Ofgem, admitted in an interview with the Financial Times last week that many of the network companies are currently earning “higher returns than we expected and I am concerned about that and I agree with some of the thrust of what Citizens Advice said”.
“We have signalled very clearly that the next price control will be tougher,” he added.