Written evidence submitted by Electricity North West (WIN0023)
Electricity North West Limited is the North West’s distribution network operation (DNO). We operate the overhead lines, underground cables and substations that bring power to 5 million people across 2.4 million homes and businesses in the North West.
We invest billions of pounds in the region, focusing on key areas of safety, reliability, customer service and net zero. Our investment plan for the next price control period, known as RIIO-ED2, will see over £2 billion invested in the North West’s power network between now and 2028. This includes over £1 million per day into the network, to ensure we continue delivering a safe and reliable service.
Our prices are some of the lowest in the country. Over the next five years, our part of bills be approximately £120 a year – equivalent to just 30p a day.
We pride ourselves on being an essential and trusted partner that everyone who lives and works in the North West relies on. Our performance results speak for themselves: we are the only DNO group rated green in every Ofgem category for the last five years running. We were the most innovative DNO in ED2 (Ofgem innovation rewards) and operate one of the most digitally enabled networks in Europe.
We welcome the Committee’s inquiry on preparing for winter and are pleased to take up the opportunity to respond.
Below, we have summarised the key points for the Committee to consider. Further detail on these points has been provided in our full response.
- As a DNO, our costs are relatively fixed and subject to robust regulatory scrutiny by the regulator. The typical cost to domestic customers in 2022-23 for Electricity North West’s part of the electricity bill was £123 – one of the lowest of any network operator. This included a £34 ‘pass-through’ cost for the Supplier of Last Resort (SoLR). Without the SoLR costs our part of a typical customer’s electricity bill for 2022-23 was £89.
- Constraints on the network could impact costs in future and we welcome Nick Winser’s conclusions on speeding up connections and planning to enable more generation to be connected to the network.
- Network innovations such as CLASS and Smart Street present considerable value in optimising the network to save money, with no action required from customers.
- We believe that network price controls are working well in delivering efficiency, value, stability and investment. Within this, there is a need to maintain focus on both current and future customers to ensure ongoing stability and appropriate investment.
We are aligned with the submissions presented by our trade body Energy Networks Association (ENA). We have not repeated their submission here but have focused on key areas where we are able to give a specific view.
Question 1: What role did the UK grid play in the high domestic prices of winter 2022-23?
- As a distribution network operator, Electricity North West’s costs for operating the local grid are relatively fixed and subject to robust regulatory scrutiny by Ofgem. Network costs refer to the cost of managing the infrastructure needed to transmit and distribute energy from generators and other energy sources to homes and businesses. These costs are stable from year to year and are set for a fixed regulatory period, reducing the chance of fluctuations arising from wholesale and retail cost fluctuations.
- The typical cost to domestic customers in 2022-23 for Electricity North West’s part of the electricity bill was £123 – one of the lowest of any network operator.
Electricity North West figures, based on the Ofgem Typical Domestic Consumption Volume of 2,900kWh.
- The reason for the above increase is due to distribution network operators having to charge an additional £34 from customers last year to cover the Supplier of Last Resort (SoLR) costs that Ofgem have determined are appropriate. This revenue recovered is passed to electricity retailers who have picked up responsibility for supplying electricity in the place of other failed suppliers who are no longer able to trade, with no administration or any other on-costs. This SoLR cost is not part of the usual costs associated with maintaining and operating a distribution network. These costs are a direct result of supplier market failures in the preceding years and are wholly outside of the control of DNOs. Without the SoLR costs our part of a customer’s electricity bill for 2022-23 was just £89.
- Whilst a trade sale of a failing supplier remains Ofgem’s preferred means of ensuring continuity of supply, experience has shown that there can be circumstances where a trade sale is not feasible. In order to protect consumers, the continual supply of essential electricity and gas must be transferred to another supply quickly. This compelling of suppliers can only be effective where a process for the recovery of the additional costs involved can be socialised across all consumers. The SoLR mechanism is the most straight forward approach available to enable this socialisation and therefore remains an essential part of the national processes for ensuring security of supply to domestic consumers.
- Constraints on the network could impact costs in future and we welcome Nick Winser’s conclusions on speeding up connections and planning to enable more generation to be connected to the network. We have responded more comprehensively on this topic in the Committee’s parallel Flexible Grid inquiry.
- Our innovations such as CLASS and Smart Street optimise the network to save money, with CLASS being a great value balancing service that Ofgem determine is worth £1bn to consumers and Smart Street optimising the network to save customers between 5 and 8% on their bills with no action on their part. These innovations could and should be rolled out nationally to ensure greater consumer benefits are secured.
Question 2: What more could have been done to prevent price shocks being passed to consumer bills?
Question 3: How should energy companies respond if customers cannot pay their bills and what actions should they not have recourse to?
- Network companies do not receive direct payment from customers. Network bills are recouped through customer’s chosen energy supplier. Despite this, we still listen to our customers’ concerns when it comes to high overall energy bills and have developed support services for our customers (e.g. Take Charge see https://www.enwl.co.uk/takecharge) using our convening power to bring together key parties such as charities and local authorities to support our local customers.
Question 4: Has Ofgem got its priorities right in addressing customer protection?
- The proposals in Ofgem’s recent consultation on strengthening supplier consumer standards is very much welcome. In particular, we are pleased to see Ofgem take forward our proposal to require suppliers to be reachable 24/7 for customers who have lost power or gas due to issues related to their metering or other supplier equipment. At present, few suppliers offer an equivalent level of response service to that of electricity and gas networks, resulting in customers contacting their network company when they have suppliers problems out of hours. We strive to support our customers as best we can but ultimately, we are limited in the support we can provide for many supplier-led activities.
Question 5: How effective is the Government's approach towards supporting the sector and delivering a functioning energy market?
- The right regulatory framework and environment is needed to continue to attract investment in the sector. Achieving net zero goals and the UK's vision for renewable, low-carbon energy necessitates substantial grid investment. Whilst Ofgem may have developed faster and more agile decision making, this needs to continually evolve in order to meet escalating investment demands. The regulatory regime itself must not be a blocker for investment.
- We acknowledge that a diverse set of sectoral changes is essential to enable the energy transition. Electricity transmission, distribution, and gas distribution all face different and distinct challenges as a result of the transition to a Net Zero future. Future price controls set by Ofgem will need to reflect these differences. Therefore, we welcome Ofgem’s review of frameworks for future systems and network regulation. However, whilst we understand that the focus is naturally on sectors other than Electricity Distribution given that ED2 has only started in recent months, it is vitally important that the specific attributes, needs and challenges of the Electricity Distribution sector are considered on their own merits and not unduly bound by decisions made for other sectors with a fundamentally different makeup. We strongly support Ofgem’s own stance that decisions on the form of the ED3 price control should be made at a more appropriate point. Indeed, the characteristics of Gas and Electricity are diverging more than ever and there is a risk aligning within the same regulatory period confounds rather than enables effective, sector-specific regulation.
- We welcome the new emphasis that has been placed on Ofgem through its new Net Zero duty as set out on 7 June. Whilst we welcome this, it is not always necessary to require formal duties of Ofgem through changes in legislation. Given this can be time consuming, other methods such as a revision to the Government’s Strategic Policy Statement or through other means can achieve the same ends required.
- The Strategic Policy Statement (SPS) sets a useful long-term direction for the whole electricity sector. The SPS sets out a grounding and expectation in the role of Ofgem in supporting Government to deliver its priorities. However, it is important in the context of Net Zero that this the SPS explicitly includes the need to deliver at pace. Delivery of Net Zero at pace is key and we here at ENWL are enabling this in the North West, leading by example in the decarbonisation of our own activities.
- When considered in the context of wider institutional reforms, such as the move to an FSO model, this risks a slow down in the pace of outcomes required to be delivered. We ultimately support the creation of the FSO, and it is important that the SPS requires both Ofgem and FSO to consider the need to deliver at pace and ensure that any institutional reform is proportionate, required and deliverable in the time available and considering sectoral and regulatory interaction.
- The risk of creating unintended consequences when it comes to wholescale institutional reform is inherent and we would also extend this to the form and function of the regulatory frameworks we operate in as currently being discussed through the Ofgem workstream ’Future System and Networks Regulation’ (FSNR). Improvements in regulatory frameworks should always be an aim though this should not be change for change sake where, by way of example, in the Electricity Distribution sector, strong incentive based regulation as characterised by the RIIO model has delivered significant benefits for customers and consumers and should continue to have the RIIO model applied.
Question 6: Is the legislative framework on pricing controls suitable for protecting consumers?
- Ofgem’s primary duty is and should continue to be protecting consumers. Consumer protection forms a key element of the RIIO network price controls. We believe that network price controls are working well in delivering efficiency, value, stability and investment. Improvements in customer satisfaction are evidence of this.
- Within this, there is a need to maintain focus on both current and future customers to ensure ongoing stability and appropriate investment.