Ofgem tweak puts cap on power distributors’ profits

Energy regulator Ofgem has announced plans to curb the profits of Britain’s electricity distribution companies just weeks after they were heavily criticised for a slow response to power cuts over the Christmas period.

Ofgem said it would cap the “cost of capital” — a key determinant of profit — for the majority of Britain’s electricity distributors at 3.8% in 2015-16, with further falls projected in the following years.

This effectively places a limit on their profits by capping the return a company can make on its investment during a price control. The regulator is in the process of setting price controls for the distribution companies for the period from 2015 to 2023.

The six distributors connect households to the main grid through overhead power lines and underground cables, and their service charge typically accounts for about 16 per cent of the household energy bill.

Ofgem’s move to limit the profits of the electricity distributors comes against a backdrop of consumer anger about the soaring cost of utility bills and a widespread belief that the distributors failed to perform in the face of Christmas blackouts.