Did you know millions of people live on an Independent energy network?
Here is how well we think these companies are serving energy consumers
Most people in Great Britain have their electricity and gas transported to them via one of the 10 principal gas and electricity distribution companies. But roughly 5% of energy customers may be surprised to learn that they live on a network that is not operated by one of them.
Citizens Advice is the official watchdog for energy consumers in Great Britain. We scrutinise the performance of energy networks because their actions affect the costs and service to consumers. Up until now, much of our work has focussed on scrutinising the main distribution networks in their RIIO price control frameworks. But given the growing number of Independent networks, we decided to undertake preliminary research to consider what the implications are for costs and customer service levels, and whether changes need to be made as these networks grow in size.
Competition between networks has offered greater choice and faster processes for developers, and theoretically the outcomes should be positive for consumers. But what we have found is that although the lighter regulatory model which Ofgem developed appears suitable to allow companies to initially grow and compete within the market it looks less appropriate when their customer bases start to achieve comparable sizes to the principal distribution networks. In addition, more needs to be done to assess how effective competition in the area has been for domestic energy consumers.
What are Independent networks?
Through changes to legislation in 1995 and 2000, Ofgem, the energy regulator introduced independent electricity distribution (IDNOs) and gas transporter (IGTs) companies who can compete with the main networks to build new connections and manage new electricity and gas networks within the geographical areas covered by the distribution networks. The intention was to improve the choice and quality of service, reduce connection costs, and encourage the development of innovative services. IDNOs and IGTs tend to supply new housing or commercial developments, and many offer water and broadband services as well, which make them attractive to housing and commercial developers.
Since their introduction, their numbers have grown at an increasing rate. There are now 14 IDNOs and 8 IGTs, with roughly 2 million gas and 600,000 electricity customers. The largest networks now have customer sizes almost equivalent to the smallest incumbent distribution network. But Independent networks are still regional monopolies — energy consumers cannot leave their network provider if they are dissatisfied. Here are three key things that we know to date:
1. Independent networks are regulated in a different way to the main distribution networks
The major difference is how Ofgem decides how much money independent networks are allowed to charge energy consumers. Whereas the main distribution networks go through a complex process of price negotiation called RIIO (Revenue = Incentives + Innovation + Outputs), the prices of Independent networks are pegged to those of the distribution networks through what’s called a relative price control (RPC). IDNO charges tend to mirror those of the host DNO for their part of the network, whilst IGTs will set their price at the level of the host GDN charge at the time they were built, and from then their prices mirror those of the host GDN with a cap and floor of 5%.
Apart from this, IDNOs and IGTs have similar obligations to the distribution networks. Many, such as ensuring they maintain an investment grade credit rating- so ensuring they have manageable levels of debt and debt paying records for example- and that networks are planned and developed according to minimum engineering standards still apply. However, there are notable differences. For example, except for establishing and maintaining a Priority Services Register, they do not have any additional social obligations such as exploring further options to attend to the needs of customers in vulnerable circumstances, nor are there requirements to produce an innovation strategy or undertake environmental reporting.
2. Competition has not lowered prices for many domestic energy consumers
Independent networks have helped to build connections and networks faster, which should help in efforts to increase housing supply. And generally, distribution network companies we spoke to also acknowledged that their introduction has encouraged them to work harder to win contracts.
The price control was designed to ensure that domestic customers would be no worse off price wise than if they were living on one of the main distribution networks. Broadly, at the inception of the price control a range of potential options were considered for both gas and electricity, but Ofgem selected the RPC model partly on the basis of cost and practicality grounds. But ultimately, with the RPC model, electricity customers end up paying similar costs as those on the main distribution networks, even though they are generally cheaper to run. This framework enables companies to achieve a reasonable level of return to compete against distribution networks, and in this context, setting the charge at the distribution level will likely be the most efficient way. But unlike the main distribution networks, Independents do not have to demonstrate anticipated future demand and investment needed in the networks as part of any funding through their business plans.
Independent gas network customers in contrast have benefitted from cheaper prices in recent years. But IGTs are still likely to benefit substantially from their price control, as their costs are likely to be lower than those of the host GDN due to the age of their networks.
A review of the relative price control is long overdue. The independent price controls were introduced in 2003 and 2005 for gas and electricity respectively. Ofgem had previously committed to a review, but this is still forthcoming, and the only substantial review since then has been an assessment of issues affecting competition in the electricity market, which found that competition was not effective in specific areas of the market. We would like to see Ofgem carry out this review. As far as possible this should assess whether the frameworks allow for a fair price to domestic energy customers and small businesses, and assess whether profit levels are supporting future network needs.
3. We have little knowledge on how Independent networks perform on customer service
In contrast to the distribution networks, Independent networks are not required to measure their customers’ satisfaction or collect feedback from them. Although some companies have started work in this area, such as through developing dedicated complaints handling teams, these activities are up to the company’s discretion and some have given little thought to doing work in this area. But these things should be the bread and butter of what drives a company to improve performance and keep developing services for their customers. At the simplest level, it is not particularly easy to find relevant information on some company websites about how to contact them, what to do during a supply interruption or what their complaints process is.
They are required to meet the same Guaranteed Standards of Performance as the distribution networks which set out basic levels of service that customers should expect, such as a guarantee to be connected within 12 hours of a blackout. But although companies are required to submit regular reports to Ofgem, they do not regularly monitor their performance against these standards, and because the Independent networks lie outside of RIIO, they are not subject to some penalties which incentivise electricity networks to pay out missed compensation. So there is the risk that customers may not receive the compensation they should be entitled to for any poor performance. In addition, the specific standards on connections (such as offering dates for the commencement and completion of connections) do not apply to all companies that can build them.
In the current RIIO price control frameworks, a number of measures were introduced to encourage and incentivise the distribution networks on social obligations and wider customer engagement. For example, GDNs are rewarded for how effectively they engage with their customers and stakeholders to inform and plan their business, and have an incentive scheme to go beyond business as usual in serving customers, including on social initiatives. And there has been much discussion as to how these could be developed or improved in the next price control framework. But given Independents do not have any social obligations in their licence, there is a risk that the needs and viewpoints of particular groups of customers might not be addressed, resulting in a postcode lottery on service depending on which type of network you live on.
What needs to change?
We will undertake further research this year to assess consumer outcomes in more detail, but based on what we know to date, we believe that regulators and the industry should:
Ofgem should:
- do more to assess how well competition is working, and set out a timeline for carrying out the review of the relative price control to which it had previously committed,
- assess whether licence conditions are still fit for purpose for Independent networks when their customer base reaches a comparable size to distribution networks, and
- consider introducing parity in the monitoring of performance standards such as Guaranteed Standards, where applicable.
We would like to see Independent networks:
- increase their level of transparency and reporting on how they deliver for their customers. Despite their often smaller size, they deliver an essential service and operate a monopoly business, which comes with a responsibility to demonstrate their customers are well served.
- explore how they can improve their engagement with their domestic and small business customers, particularly in serving the needs of customers in vulnerable circumstances. We are seeing a shift in this area from distribution networks, which customers on Independent networks shouldn’t miss out on.
