Ofgem, the UK energy regulator, could potentially save consumers a further £4.1bn, on top of the estimated £5bn, by cutting excess profits made by energy network companies, according to a study by Citizens Advice.
The energy consumer watchdog Citizens Advice found that on top of the £5bn Ofgem already announced that companies should expects profits to drop, an additional £4.1bn could be slashed as well, bringing the total consumer savings to £9.1bn.
Through a study commissioned by UK Regulators Network (UKRN) it was revealed that Ofgem's current methodology might be flawed and by taking into consideration the new methodology proposed by UKRN, the savings for consumers can be much bigger.
Gillian Guy, chief executive of Citizens Advice, said: “These decisions may seem extremely technical, but they matter. Get them wrong and it hits consumers directly in the pocket.”
“Regulators face a difficult balancing act. Forms need to be able to attract investment and investors need suitable levels of returns. But regulators need to ensure that the decisions they make don't allow companies to make billions in excess profits and leave customers to pick up the bill.”
Ofgem sets price controls for companies using a framework called Revenue using Incentives to Deliver Innovation and Outputs (RIIO), but will be introducing RIIO-2 which will further reduce returns for companies.
In the past, the energy regulator has considered energy companies to have the same level of risk involved as the average stock market firm, while according to the research by UKRN in reality they are far less risky than what Ofgem has stated in the RIIO-2 framework.
Guy continued: “A new approach to analysing the risk of these forms will mean lower returns for investors, but the result is a better deal for consumers.”
RIIO-2 is set to take effect in 2021 and aims to increase consumer involvement by setting up independent consumer panels to challenge companies' business plans and pay closer attention to the decision making.
A spokesperson for Ofgem said: “We welcome the Citizens Advice contribution to the debate. The next price controls from 2021 will be tougher on network companies with lower expected returns, resulting in more than £5bn in savings for consumers.”
“Estimating the risk faced by network companies is an important part of the price controls and we are considering the findings from the UKRN report carefully.”