City Research Online

Abstract

Debates concerning the UK energy crisis have so far focussed on what policy changes are required with respect to major energy suppliers and integrated oil and gas companies. Very little attention has been given to another group of important players in the energy system: the major electricity distribution network operators (DNOs) and the gas distribution networks (GDNs) at the heart of the UK’s energy sector.

The DNOs and the GDNs play a vital role in controlling the distribution of gas and electricity from the National Grid to end consumers of energy: households and businesses. The sector is a natural monopoly, meaning there are severe limits on the amount of competition that can be introduced to lower prices to consumers. As a natural monopoly, the DNOs and GDNs are regulated by The Office of Gas and Electricity Markets (Ofgem), which sets prices and is supposed to act in the interests of consumers and work towards environmental improvement and improved energy security.

This briefing examines the financial performance and ownership structures of these often-overlooked companies. It finds that the GDNs and DNOs enjoy the highest profit margins of any sector in the UK. Alongside extreme profit margins, the briefing also finds concentrated market structures: in the case of both gas and electricity distribution, just a small collection of companies have more than 90 percent market shares.

The research further shows that the DNOs and GDNs are part of a global network of wealth extraction, in which income generated from UK households’ gas bills is channelled through to an assortment of tax havens, sovereign wealth funds, foreign pension funds, and some of the world’s wealthiest individuals. These network companies pay out eye-watering sums to their owners: the dividend payments of the major DNOs totalled £3.6 billion from 2017 to 2021, and for the GDNs they amounted to £2.4 billion over the same period.

The analysis further identifies a less discussed channel for wealth extraction: interest payments on inter-company borrowing. These payments on debt owed to shareholders, parent companies and affiliates in the ownership network, like dividends, serve to enrich ultimate owners, even though the routes taken by interest payments to equity holders can sometimes be more circuitous. The interest payments on the internal debt of the major GDNs amounted to £928 million from 2017 to 2021, and totalled £842 million for the DNOs over the same period. Meanwhile the effective tax rates of the DNOs and GDNs are significantly lower than for the average company in the FTSE 100.

In the context of the energy crisis, and the wider cost of living crisis, the briefing argues that the DNOs and GDNs should be subjected to much greater public scrutiny. Given their extremely high profit margins and extractive business models, these companies must be front and centre in any conversations about windfall taxes and plans to bring the energy system back into public ownership. The analysis suggests that Ofgem has prioritised the financial returns of these companies over the financial security of British households strained by the rising costs of living. The gas and electricity distribution system in the UK is broken. It is high time for it to be overhauled.

Publication Type:	Report
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HJ Public Finance H Social Sciences > HN Social history and conditions. Social problems. Social reform
Departments:	School of Policy & Global Affairs > International Politics

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