Source: Common Wealth analysis of LSEG and FAME data.

Note: Energy networks are highly capital-intensive, and thus high profit margins are needed in part to recover the initial capital outlay. Return on capital employed (operating profits divided by total assets net of current liabilities) is more comparable across sectors with varying capital intensity than revenue-based profit margins. However, for our purposes the salient question is not whether networks provide an excessively lucrative investment opportunity relative to alternatives from the perspective of investors, but rather whether this level of profit is necessary to expedite the kind of fixed capital formation that we know we need, to which the answer is: only if you rule out public ownership. If the nature and detail of our investment needs are already relatively clear — we do not need a decentralised market to discover those needs for us — then the extent to which the refusal of direct public investment causes us to over-pay for networks is better captured by revenue-based profit margins than by asset-based returns metrics.

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Source: Common Wealth analysis of LSEG and Ofgem data.

Note: Based on the breakdown of Ofgem's price cap for direct debit standard variable tariffs — which covers 20 million households — averaged across 2024. Ofgem calculate the price cap to allow retailers a small 2.5% EBIT margin based on their expected costs, two thirds of which comprise network and wholesale costs. Pretax margins for networks averaged 37.3% in 2024. Ofgem-licensed generation firms averaged margins of 32%. Allowances include: the adjustment allowance, direct debit payment method uplift allowance, headroom allowance and levelisation costs.

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Source: Common Wealth analysis of Ofgem data.

Note: The energy networks are able to charge customers via their bills the total capex allowance approved by Ofgem. If networks underspend, they are able to pocket a portion of this difference as extra profit — with only some of it retroactively returned to consumers — creating perverse incentives at a time when more investment is needed, not less.

Load-related capex refers to the installation of new assets, whereas non-load refers to the maintenance of existing assets. Underspend relative to allowance is greater for the former, but this chart focuses on the latter on the basis that this category of underspend in particular cannot be explained by planning bottlenecks exogenous to firm governance.

The replacement of transformers has been a particularly pronounced area of underinvestment over many years, which now poses a severe problem as supply chain bottlenecks have recently emerged alongside rising global demand. The UK has recently witnessed a number of substation fires associated with ageing transformers.

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