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DNOs hit back as report claims profits added £10bn to consumer bills

Pressure is continuing to mount on the UK’s distribution network operators (DNOs) after a report from the Energy & Climate Intelligence Unit (ECIU) think-tank has claimed their profit margins added £10 billion to consumer bills in a six-year period.

Hot on the heels of a Citizen’s Advice study which said DNO’s had pocketed £7.5 billion in “unjustified profits” in recent years, ECIU’s study has claimed their average net profit margins between 2010-15 were 32%.

This is equivalent to about £10bn on the nation’s collective energy bill over six years, or around £27 per home, per year, in profits alone.

In addition, it calculated the average dividend pay-out was 15% of turnover, half of the final profit figure. In total for the period 2010-2015, ECIU says over £5.1billion was paid out in dividends. Based on around 44% of national electricity expenditure falling to domestic customers, each household contributes around £13 per year to this.

DNO revenues, profits and margins for 2010-15. Table taken from ECIU report 'Monopoly money'.

CompanyRevenue (£m)Operating profit (£m)Operating margin (%)Final profit (£m)Profit margin (%)
Electricity North West2,7591,42051.571025.7
Northern Powergrid4,2602,20451.71,49035.0
SSE5,7502,37041.21,66428.9
Scottish Power4,3992,37554.01,71138.9
UK Power Networks8,2934,36952.72,50630.2
Western Power8,0134,50456.222,61832.7
Sector33,47317,24251.510,70032.0

In light of the Citizens’ Advice report, as well as the recently launched government review of energy costs by Professor Dieter Helm and the level of attention now centred on energy policy following the most recent general election, ECIU director Richard Black has said the time has come to scrutinise the entire energy supply chain.

“Britain can be proud it has one of the most reliable power networks in the world; the lights aren’t going out and the network firms can take some of the credit for that. But this doesn’t require that we write blank cheques; and just as profits of the ‘Big Six’ have rightly come under the magnifying glass, the companies operating the power cables deserve scrutiny too, particularly with such large chunks of dividends leaving the UK economy,” he said.

“The UK’s power sector is a somewhat murky world and it’s easy to blame ‘green levies’ but that argument doesn’t really hold much water. More stones need to be turned over and we hope Dieter Helm’s energy review is bold enough to take that on.”

War of words over "fundamentally flawed" report

However, the Energy Networks Association (ENA) has hit back at the report on behalf of its DNO members, rejecting its claims and saying it uses “outdated and incomplete data” and “a fundamentally flawed and incorrect methodology”.

It says the report is misleading by claiming revenue as profits without taking into account the value of the assets themselves and the £15.3 billion invested by companies between 2010 and 2015. The ENA also criticises the report for ignoring the current price control period RIIO-ED1 in which it argues that costs have fallen by an average £8.50 per household per year.

However, ECIU is very clear that the reporting period chosen was 2010-15 at a time when DNOs were subject to a price control system known as DPCR5 which was subsequently replaced by RIIO. The ENA, which nevertheless quotes an Ofgem report on the period 2010-2015 which calculated the average return of DNOs to be 12%, contends that analysis of the DCPR5 is outdated.

ENA chief executive David Smith said: “The UK’s energy networks have a strong track record of consistently delivering for our households, businesses and communities. They are amongst the most reliable in the world and their performance has never been better.

“This poor piece of work makes unsubstantiated claims without any means to back them up. It ignores the way companies make profits, would seek to jeopardise our vital network investment and does all this against a backdrop of network companies delivering even more efficient investment as distribution costs are set to go down.” 

Ofgem "asleep at the wheel"

John Penrose, MP for Weston-super-Mare, said: “This report suggests that Ofgem has been asleep at the wheel while the network operators have been overcharging everyone for years.

"What’s the point of a regulator that doesn’t stick up for consumers against vested interests, whether it’s the Big Six energy firms or the firms that own the pipes and wires which get energy and power to our homes?

"We need a heavyweight, cross-sector regulator that isn’t scared to do its job and which won't turn tail and run at the first sign of resistance."

A BEIS spokesperson told CEN: “Price controls are set independently of government but it is important the regulatory regime operates effectively and that consumers can rely on energy that is secure, clean and affordable.” 

Despite the claims, Ofgem has recently told DNOs to expect tougher price controls in the future to evolve alongside the “unprecedented pace and scale” of change currently occurring within the UK’s power system.

In response to the ECIU report, an Ofgem spokesperson said: “Consumers get good value from Ofgem’s regulation. Network costs on bills have fallen by 17% over the last 30 years… Ofgem has so far secured an additional saving of over £4.5 billion for consumers from the current price controls by a combination of reduced revenues or voluntary contributions from companies.

“We continually look for ways to get a better deal for customers on network costs. Therefore we have told the network companies to prepare for tougher price controls from 2021 with lower overall returns.”