A brief history of pay, prices and profits in the UK’s energy networks

A brief history of pay, prices and profits in the UK’s energy networks

Dividends for shareholders in the UK’s energy network companies have been much higher than regulator Ofgem expected – but pay has declined

Pay has been declining in real terms across the energy industry as a whole over the past decade. This is an acceleration of a longer-term trend of declining compensation growth relative to growth in corporate earnings since privatisation.

For Prospect grades, the picture appears to have been less negative, with average pay awards slightly above RPI inflation. But this disguises significant (and growing) variation, with big falls in real pay in some cases, while overall average annual awards are significantly below pre-crisis levels.

The growing variation in pay rates for engineering labour in the electricity networks has accelerated since 2007, despite a broadly similar (and positive) business environment.

What is RIIO?

Ofgem, the energy regulator, sets price controls – a ceiling on the amount that companies can earn from charges to use the networks.

It uses a performance-based framework to set these controls, called RIIO, which stands for Revenue = Incentives + Innovation + Outputs.

Ofgem increases the revenues that network companies can collect each year in line with RPI. However, the regulator accepts that some costs don’t change in line with RPI, including wage costs.

So a mechanism called Real Price Effects (RPEs) is used to compensate for the difference between RPI and the actual change in certain costs, like labour.

When Ofgem was setting the level of these allowances, network companies argued that they weren’t generous enough and that recruitment and retention issues would be exacerbated if they weren’t increased.

However, actual spending on labour costs during the current price control period has generally not matched the level of the allowances.

In National Grid’s case, this has netted them an estimated £158m since 2013, though some of this will potentially be returned to consumers.

Some companies’ labour costs have not even risen in real terms (ie in line with RPI). Given that overall revenues are index-linked, there is little justification for below-inflation increases in payroll spending.

Conversely, spending on dividend payments has generally been much higher than Ofgem expected – this reinforces the trend of declining returns to workers relative to shareholders.

We have a strong case for arguing that companies should be spending more on their workforces. As the companies argued themselves five years ago, the skills crisis will only worsen if pay doesn’t improve.

Network company dividend payments vs Ofgem forecasts during RIIO-1

SSE                                                  242.2%

Electricity NW                                    85%

UKPN                                                76.5%

ScottishPower                                    66.9%

National Grid                                     48.4%

WPD                                                 -2.3%

Northern Powergrid                            -4.9%

 

Change in real spending on total wages/salaries* per employee

WPD                                          7.2%

Electricity NW                             -0.6%

UKPN (2011-17)                         -8.7%

Northern Powergrid                     -10.2%

National Grid                              -11.5%

SSE                                           -13.7%

SP Energy Networks                    -18.1%

(2012-16)

* Total pay includes all elements of pay including bonuses and overtime, but not pensions

Nick Kardahji

Nick Kardahji


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