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Missing Money in UK Energy Networks

UK energy networks are underspending by almost half a billion pounds every year compared to what they asked to invest.
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Update

Missing Money in UK Energy Networks

UK energy networks are underspending by almost half a billion pounds every year compared to what they asked to invest.

Executive Summary

UK energy network operators have systematically underspent on vital infrastructure replacement by £490 million annually, according to new regulatory data that raises questions about the private sector’s stewardship of critical national assets.

Analysis by the think tank Common Wealth of figures released by energy regulator Ofgem earlier this month show that 10 of the 14 network companies responsible for Britain’s electricity and gas infrastructure have spent significantly less than budgeted on replacing and refurbishing existing assets — work essential for maintaining system reliability and preventing failures. Electricity distribution accounts for about £290 million of this underspend, with electricity transmission in second place with £170 million of underspend.

The data covers 2023-2024 for electricity distribution networks and 2021-2024 for electricity transmission, gas transmission and gas distribution operators.

Electricity distribution companies accounted for the largest portion of the shortfall at £290 million, followed by electricity transmission operators at £170 million, according to the analysis of Ofgem’s figures. In total, network companies invested only £3.1 billion annually on “non-load” capital expenditure against an approved budget of £3.6 billion.

[.fig][.fig-title]Energy Networks are Chronically Underspending on Vital Infrastructure for Which Planning Permission is Largely Unnecessary[.fig-title][.fig-subtitle]% of non load capex allowances over or underspent, 2021-2024[.fig-subtitle][.fig]

[.notes]Notes: 2021-2024 for electricity transmission, gas transmission, electricity distribution. 2023-2024 for electricity distribution. Load and non load capex not broken down in gas distribution data from Ofgem. Figures in graph based on capex plus repex. Source: RIIO-2 annual reports supplementary data files.[.notes]

The report argues that the underspending reflects a regulatory structure that incentivises companies to overestimate required investment in their business plans and then pocket a portion of the difference as profit when they underspend.

For their part, companies and the regulator have blamed supply chain and labour constraints for the investment gap. Ofgem cited limitations on “specialised resource” manufacturing capacity and restrictions on network access during maintenance as key factors behind the shortfall.

The findings come amid growing concern about Britain's ability to deliver major infrastructure projects and the reliability of its ageing energy networks. Unlike road and rail infrastructure, these networks are entirely owned and operated by private companies, making the case a useful test of competing theories about Britain's infrastructure challenges.

While planning constraints are often blamed for delays to new infrastructure development, “non-load” capital expenditure — which involves maintaining existing assets rather than building new ones — typically requires little or no planning permission, suggesting that other factors are at play.

The revelation that companies are substantially underspending on critical maintenance while still generating returns for shareholders is likely to fuel calls for reform of the regulatory framework and potentially rekindle debates about public versus private ownership of essential infrastructure.

In 2022, Common Wealth found the electricity distribution networks had the highest operating margin of any UK industry, with gas distribution networks a close second.

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Missing Money in UK Energy Networks
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