The energy regulator’s intervention – which looks ahead to the next round of controls in 2021 – will affect the price charged by energy networks to household suppliers.
This is passed on to consumers and represents around a quarter of bills or a typical £251 a year.
It comes as Citizens Advice blamed the regulator for allowing the network companies to make an excess £7.5bn in profit – paid for by households – over the past eight years.
The charity claimed Ofgem had, in the current period of price control, overestimated the costs and risks facing network companies, allowing them to make “sky-high profits” that were not justified by their performance.
It called for them to return £7.5bn to consumers.
Ofgem admitted that their profits had been “towards the higher end of expectations” over the last four years, but it said customers had benefitted in the form of lower charges.
Rising household energy bills have been at the top of the political agenda and during the election the Tories pledged a price cap, though the plans were absent from the Queen’s Speech.
Britain’s Big Six energy suppliers have been the focus of anger over rising bills though the companies themselves have pointed to the effect of costs including those charged by network operators.
National Grid, UK Power Networks and SSE (which also operates a “Big Six” household supply business) are the main players.
These networks are monopolies so the regulator sets controls for the maximum amount the companies can recover to fund operations and investments.
Now, Ofgem says there is clear evidence pointing towards the cost of investment required for networks being “significantly lower”.
“Ofgem is signalling today that companies need to prepare themselves for a tougher round of price controls from 2021,” it said.
Jonathan Brearley, Ofgem’s senior partner for networks, said the regulator was “working to ensure that customers pay no more than they need to for energy networks while still benefitting from improvements in reliability and service”.
He added: “Setting tougher controls will ensure that Britain’s energy networks deliver even better value for customers.”
Ofgem chief executive Dermot Nolan said: “While we don’t agree with its modelling and the figures it has produced, the Citizens Advice report raises some important issues about network regulation which will be addressed in the next control.”