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Ofgem crackdown could save consumers £5bn on energy bills

Companies operating the UK power network are going to face a price squeeze (Chris Ratcliffe/Bloomberg via Getty Images)

Households could save a combined £5bn over the next five years on their fuel bills as the industry watchdog gets tough on how consumers’ money is spent.

Ofgem’s new rules will limit the amount money energy companies can return to shareholders and it wants to cut how much consumers contribute towards energy network investment via their bills.

The overall effect will see savings of between £15 and £25 for households, it said.

MORE: Ofgem imposes ban on catch-up energy bills

The price controls will come into force in 2021 and could significantly reduce the profits energy network companies receive.

National Grid, which runs the bulk of Britain’s power infrastructure, said the consultation was “another important step” in the price control process.

“We will continue to work constructively with Ofgem over the next three years to achieve the best outcomes for all stakeholders. We will keep the market updated as the process moves forward,” it said.

Ofgem says bills should come down by as much as £25 a year under its plans (Getty Images)

In its proposals, Ofgem wants to see the amount network companies pay their shareholders – a cost of equity range – of between 3% and 5%, the lowest rate ever proposed for energy network price controls in Britain.

MORE: 5 million poorest households face 5.5% energy bills rise – after watchdog changes tariffs

Network costs make up about £250 of an average annual household ‘dual fuel’ bill of about £1,100.

Citizens Advice last year claimed network companies – firms that run the pipes and wires that carry gas and electricity – made “excess profits” of £7.5bn owing to errors in forecasting price controls.

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Gillian Guy, its chief executive, said: “These proposals should prevent a repeat of the billions in excess profits energy network companies are making under the current price controls. This means better value for consumers and potentially lower bills.”

Ofgem said under its price control regime, the cost of transporting a unit of electricity around Britain had fallen by 17% since the mid-1990s. Gas networks, it said, had seen significant investment of more than £20bn since 2002.

Companies have until May 2 to respond to Ofgem’s proposals