Ofgem’s Attempts to Limit Electricity Prices Rises

The industry regulator, Ofgem, aims to manage the supply of energy to UK homeowners and businesses. We look at their attempts to limit price rises.

The regulator’s mission is all-encompassing. They aim to open the industry to additional energy suppliers to improve market competitiveness. Back in 2010 and years before the war in Ukraine, this strategy largely worked. At that time, the race for Net Zero was merely a loose target.

Roll the clock forward 15 years, and the results are different. Over 50 energy suppliers went bust, leaving the remaining suppliers to manage those customers affected. The amount of government levies increased, leading to higher bills. Today, Ofgem manages market pricing through the Energy Price Cap mechanism.

The first price cap in January 2019 was £1,104 per year. The equivalent today is over 60% higher, even though the gas wholesale price is largely similar.

Take a look back to 2010 when we wrote about how an open market approached pricing for customers:

Ofgem and the seven main electricity suppliers in the UK have reached an agreement that, on average, UK electricity prices will not rise by more than £4.30 per household per year for the next 5 years.

The agreement announced in January 2010 is for the seven owners of the UK’s electricity distribution network that control 14 regional networks that transport electricity from the National Grid directly into domestic houses and business properties.

As part of this agreement, these companies will be able to invest up to £7.2 billion to upgrade their existing networks, including a £500 million fund to trial smart grids, as required in a low-carbon economy.

The price controls, which have been under consultation for many months, set the maximum revenue that energy companies can earn from their customers. These are the targets set until 2015. Some companies, including EDF, were debating whether to refer the price controls Ofgem wanted to implement to the Competition Commission, but in the end, all energy companies accepted the proposals.

The price controls affect around 20% of an energy bill for electricity. The energy companies were initially concerned that they could not make enough profits while investing in upgrading their networks and undertaking tests on smart grids.

This exercise was the fifth electricity price review, codenamed DPCR5 for EDF, and their Chief Executive, Vincent de Rivaz, said:

“Our comprehensive and detailed analysis of Ofgem’s Final Proposals has been carried out with a clear vision for the future of this business to meet the needs of all its stakeholders.  In a nutshell, this package will be challenging, but this business is ready to rise to this opportunity.”

“This package provides some real opportunities for EDF Energy and its network employees to build on their success over the last five years.  We look forward to engaging with all our stakeholders to meet our business objectives as we set out on the next five years of this journey.”

“EDF Energy has delivered £2.1bn of capital expenditure since 2005. In doing so, we have already led the way in demonstrating the need for increased investment, a path which the other operators are now following for the DPCR5 period.  Now we also intend to lead the way with our programme of further efficiency improvements and even higher levels of customer service.”