A report yesterday used simplistic calculations to generate fundamentally inaccurate figures on how much profit energy network operators make. Here, we set out the detail on how energy networks invest, spend and create profit.
UK energy network operators earn around 5% profit on their investments. This profit margin is set by Ofgem and allows operators to mobilise over £25,000,000,000 of investment into the UK’s energy infrastructure over the next five years from 2023.
This expenditure and investment – alongside the 36,000 people employed by the sector in Great Britain – enables safe, sustainable and reliable networks to deliver the energy that communities need now and on into a decarbonised future.
When calculating how much network operators make, it’s important to remember:
- Operating profit margin is the wrong measure to use to assess profitability. It’s therefore wrong to draw a conclusion on profitability based on operating margin.
- The correct measure of profitability is returns.
- A reasonable level of return in a capital-intensive industry can be expected to translate into a high operating margin. For example, a 3% return on assets translates to approximately 30% operating margin in the electricity transmission sector.
- The combination of high upfront costs and long-lived assets means that the energy network industry is by its nature highly capital intensive. A high operating margin should therefore be expected, but this alone does not allow us to infer anything about the level of allowed returns.
We should also remember that excluding costs relating to the supply market failure, network charges (that’s the portion of the energy bill which goes towards networks) have remained broadly flat since 2015.
From next year, the average cost of electricity distribution network charges on customers’ bills is set to fall both as a proportion of the bill and in absolute terms as we enter the new investment cycle.
Finally, it has also been claimed that network operators' profits were affected by recent energy market turmoil. This is wrong. Network charges are in no way linked to the whole energy price.
Earlier in the year, we commissioned a detailed looked at the report by think tank Common Wealth on which much of yesterday’s reporting was based. You can read the report in more detail in our explainer.
We are keen to engage with everyone with an interest in the future of the UK’s energy networks, but we must do so from a basis of fact.
About Energy Networks Association
Energy Networks Association (ENA) is the industry body representing the electricity wires, gas pipes and energy system in the UK and Ireland.
ENA helps its members meet the challenge of delivering electricity and gas to communities across the UK and Ireland safely, sustainably and reliably.
Its members include every major electricity and gas network operator in the UK and Ireland, independent operators, National Grid ESO which operates the electricity system in Great Britain and National Gas which operates the gas system in Great Britain. Its affiliate membership also includes companies with an interest in energy, including Heathrow Airport and Network Rail.
What are energy network operators?
Energy network operators manage and maintain the wires, pipes and other infrastructure which delivers electricity and gas to your home, business and community. They are private companies which are regulated by Ofgem and employ around 40,000 people in Great Britain.