Posted: 5 September 2014
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Striving to meet customer needs while reducing costs and maintaining reliability
Striving to meet customer needs while reducing costs and maintaining reliability

How is National Grid supporting the Energy and Climate Change Committee’s inquiry into energy network costs? Ahead of John Pettigrew meeting the Committee on 9 September, Connecting looks at the main topics on the agenda.

Network costs account for about 23% of an average dual fuel bill.

Ofgem.

The Energy and Climate Change Committee (ECCC) is currently conducting an inquiry into energy network costs, specifically looking at the transmission and distribution of electricity and gas. This is part of ongoing Parliamentary scrutiny of energy prices, profits and the issue of fuel poverty.

National Grid’s job is to connect people to the energy they use, safely. An important part of that role is to deliver value for money for consumers while maintaining a reliable service. Against that backdrop John Pettigrew, National Grid’s UK Executive Director, will be giving evidence to the ECCC on 9 September.

According to Ofgem network costs account for about 23% of an average dual fuel bill. While network charges reduced by 50% in the 15 years after privatisation, they have risen slightly in recent years as new networks are built to connect low carbon energy, replace old gas mains and renew ageing parts of the network.

The ECCC will explore a range of issues including how transparently current and future network costs are determined; and the effectiveness of Ofgem in monitoring the charges and profits of network companies.

The Committee will also investigate the impact on network costs of low carbon ambitions, such as the roll-out of smart meters, how UK network costs can be benchmarked against utility sectors in other countries and the incentives provided by Ofgem to network companies to keep their costs as low as possible.

National Grid coordinates and directs the flow of power through the UK’s transmission networks. We also own much of the transmission infrastructure, along with half of the gas distribution networks that take gas from the transmission system directly to homes and businesses. This means we own and maintain infrastructure which includes:

  • 4,470 miles of electricity overhead line, 870 miles of underground cable and 335 substations;
  • 4,760 miles of high pressure gas transmission pipeline and 23 compressor stations; and
  • 81,000 miles of gas distribution pipeline, transporting gas to around 10.9 million consumers.

For an average annual domestic electricity bill of £600 the electricity transmission cost is £20 or 3% of the customer’s bill. On the gas side, for an average annual domestic gas bill of £755 the transmission costs are £17, and (for customers using our distribution networks) the distribution costs are £135.

Driving down costs, while maintaining reliability and customer service, lies at the heart of National Grid’s business model, while the nature of this business model ensures commitment to be as efficient and transparent as possible.

In particular, Ofgem’s RIIO (Revenue = Incentives + Innovation + Outputs) price control regime brings significant scrutiny and openness around National Grid’s investment plans and the charges passed on to consumers. In addition, our price control includes incentives to minimise the costs and associated risks of balancing the system through buying and selling energy, as well as procuring balancing services from industry participants.

The 2012 industry and regulatory review of National Grid’s investment programme over the eight years to 2021 settled on a best estimate of £22.5bn to extend and strengthen essential networks to connect new sources of energy to the grid. Despite this significant investment, the outlook for National Grid’s network costs over the coming years is that for a typical household receiving service from all networks, costs will remain broadly flat in real terms (i.e. excluding inflation).

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