Ofgem let private companies make an extra £3.9 BILLION profit they weren’t supposed to

In 2020, Citizens Advice warned Ofgem about a loophole in its price regulation calculations. Instead, the energy regulator enabled the privately-owned energy supply network, which includes the National Grid, UK Power Networks (owned largely by a Hong Kong company), and Scottish Power, to make an extra £3.9bn in profit from the loophole over the last four years.

The loophole meant there was an overestimation of borrowing costs for the companies that own our energy infrastructure.

Citizens Advice pointed out:

During this time, the charity has helped a record nearly 700,000 people in England and Wales struggling to afford their energy bills, and five million currently live in households in debt to their supplier.

In response, Ofgem laughably claimed it didn’t ignore the loophole but chose not to act on it because of retroactive regulatory ‘financing’ costs. It’s unclear in what world that would amount to more than £3.9bn.

Ofgem and energy companies: quite the cosy set up

The revolving door between public sector regulators and the companies they are supposed to regulate may play a role here. From 2017-2022, nearly half the senior regulators (63 out of 146) who changed jobs went to work at companies they were previously regulating.

That includes the former lead executive of Ofgem joining Octopus Energy, the largest energy supplier in the UK at 23.7% of the market.

In 2022, a non-executive director at Ofgem, Christine Farnish, resigned over her view that the regulator put the interests of corporate suppliers above that of the public.

Indeed, the energy network is a clear cut natural monopoly whereby there simply cannot be any market competition. There is only one network of transmission lines, substations and other infrastructure. Instead of the public owning the grid, which would be cheaper for people and businesses throughout the country, we rent the grid from the private sector.

The monopoly service trumpets the innovation it’s bringing to the energy network. It’s cooperating with the University of Manchester to deliver more productive ways of maintaining the grid such as through AI, drones and software. That proves that innovation is not just a feature of private sector competition – given there is only one energy network. Here, the private sector is itself demonstrating that cooperation, not competition is effective in delivering innovation.

With regard to the recent £3.9bn additional profit extraction, Clare Moriarty, chief executive of Citizens Advice, said:

We now know that while households have struggled with sky-high energy bills, network companies have been making astronomical profits.

We’ve called out the billions of pounds of excess profits made by these companies before, and Ofgem said it would get tougher in subsequent price controls. The measures it put in place have clearly failed.

Featured image via the Canary