Where does the money go? Local electricity networks
Every electricity bill contributes towards maintaining Britain’s local electricity networks.
These networks — operated by Distribution Network Operators (DNOs) — carry electricity from the high-voltage transmission network through regional and local networks until it reaches our homes and businesses.
They maintain substations, cables, overhead lines and other infrastructure. They repair faults, connect new customers and increasingly have to accommodate technologies such as electric vehicles, heat pumps, batteries and distributed generation.
This infrastructure is essential.
But Britain’s DNOs are also regional monopolies. Households cannot choose which distribution network carries their electricity.
That makes an important question:
How much does operating and investing in Britain’s local electricity networks actually cost — and how much economic value is retained by their owners?
Who are Britain’s local electricity networks?
Great Britain has 14 licensed electricity distribution networks operated by six DNO groups:
| DNO group | Principal areas served |
| Electricity North West | North West England |
| Northern Powergrid | North East England, Yorkshire and northern Lincolnshire |
| National Grid Electricity Distribution | Midlands, South West England and South Wales |
| UK Power Networks | London, South East England and East of England |
| SP Energy Networks | Central and southern Scotland, Merseyside, Cheshire and North Wales |
| Scottish and Southern Electricity Networks | Northern Scotland and central southern England |
These companies do not compete with each other for domestic customers.
Your DNO is determined by where you live.
How are DNOs paid?
Most households never receive a bill directly from their DNO.
Instead, electricity suppliers pay Distribution Use of System charges — DUoS — for using the local electricity distribution networks.
Suppliers recover those costs from customers through electricity tariffs.
That means network costs ultimately appear within the electricity bill even though the household does not normally make a payment directly to the network company.
Distribution costs can contribute to both the unit-rate and standing-charge economics of an electricity tariff.
There are also directly remunerated services, such as certain connection services, which sit outside the core regulated revenue mechanism.
DNOs don’t simply choose what to charge
Because electricity distribution networks are regional monopolies, their revenues are regulated by Ofgem.
The current electricity distribution price control is called RIIO-ED2 and runs from 1 April 2023 until 31 March 2028.
RIIO stands for:
Revenue = Incentives + Innovation + Outputs.
Ofgem determines how much revenue networks are allowed to recover while setting requirements for investment, reliability, customer service and other outputs.
The system is intended to provide enough revenue to operate, maintain and invest in the network while also providing investors with a return.
This is fundamentally different from a normal competitive market.
Customers cannot switch to another set of electricity cables if they think their local network is too expensive.
What did the local networks actually cost?
Ofgem reports both the expenditure allowance and the actual expenditure of each DNO.
For the first year of RIIO-ED2 — 2023/24 — the numbers were:
| DNO group | Expenditure allowance | Actual expenditure | Difference |
| Electricity North West | £358m | £281m | −£77m |
| Northern Powergrid | £518m | £420m | −£98m |
| National Grid Electricity Distribution | £1,168m | £991m | −£177m |
| UK Power Networks | £1,020m | £869m | −£150m |
| SP Energy Networks | £613m | £539m | −£75m |
| Scottish and Southern Electricity Networks | £729m | £689m | −£40m |
| Total | £4.407bn | £3.789bn | −£618m |
Figures are in 2020/21 prices.
Collectively, Britain’s local electricity distribution networks therefore spent approximately:
£3.789 billion
during the first year of RIIO-ED2.
Ofgem had provided expenditure allowances totalling:
£4.407 billion
Actual expenditure was therefore:
£618 million below allowance.
That is approximately 14% below the collective allowance.
Every DNO group spent below its allowance
The result wasn’t caused by one unusual network.
Every DNO group reported expenditure below its first-year allowance.
Electricity North West was 22% below allowance.
Northern Powergrid was 19% below.
National Grid Electricity Distribution was 15% below.
UK Power Networks was 15% below.
SP Energy Networks was 12% below.
SSEN was 6% below.
There are legitimate reasons for these differences.
Ofgem identifies factors including mobilisation delays, projects being moved into later years, supply-chain constraints, lower-than-expected connections and genuine efficiency improvements.
An underspend should therefore not automatically be interpreted as excess profit.
Some expenditure may simply occur later.
Indeed, across the complete five-year RIIO-ED2 period, DNOs were forecasting combined expenditure of £22.496bn against baseline allowances of £22.112bn at the time of Ofgem’s report.
But who keeps the savings?
This is where the regulatory system becomes particularly interesting.
Ofgem deliberately gives DNOs a financial incentive to reduce expenditure.
This is called the Totex Incentive Mechanism — TIM.
If a network delivers its required outputs for less than its expenditure allowance, the saving isn’t simply returned entirely to consumers.
Instead, the saving is shared between customers and the network company.
The mechanism also operates in the opposite direction when expenditure exceeds allowances.
Ofgem says the average sharing factor is approximately 50%.
For 2023/24, DNOs collectively spent £618m less than their expenditure allowance.
Ofgem therefore estimates that approximately half of this underspend should ultimately return to customers.
That implies, approximately:
£309 million → customers
and
£309 million → retained by DNOs
Ofgem specifically cautions that this simplified calculation may not fully represent the broader financial position.
The £309m should therefore not be described as accounting profit.
It is, however, an example of economic value being deliberately retained by network companies under the regulatory incentive system.
Why allow networks to retain savings?
There is a rationale behind this arrangement.
Imagine Ofgem allowed a network £100m to deliver a programme.
If every pound the network saved was simply removed from its future revenue, there would be considerably less financial incentive to find cheaper ways of delivering the work.
Under the incentive mechanism, both parties can benefit.
If the network delivers the same required outcome for £80m, part of the £20m efficiency saving can eventually benefit consumers while the company retains another part.
The policy question is therefore not whether efficiency should be rewarded.
It is:
What is an appropriate reward for operating a monopoly infrastructure business efficiently?
Economic value is being created for investors
DNOs aren’t charities or government agencies.
They are commercial infrastructure businesses with shareholders and investors.
Their regulated revenue ultimately has to provide sufficient returns to attract capital.
Ofgem therefore measures network shareholder performance using Return on Regulated Equity — RoRE.
RoRE measures the financial return achieved by shareholders from a regulated network during the price-control period.
Returns can be affected by several things, including:
- the baseline return allowed by Ofgem;
- expenditure being above or below allowances;
- performance incentives and penalties;
- financing performance;
- taxation; and
- inflation.
This is therefore a more useful measure of investor returns from regulated networks than simply looking at the headline accounting profit of the wider corporate group that owns them.
Where does the money flow?
The local distribution part of an electricity bill can broadly be thought of like this:
Household
↓
Electricity supplier
↓
Distribution Use of System charges
↓
Local DNO
↓
Network operation + maintenance + investment + financing
↓
Investor return
That final stage matters.
Once the costs of delivering the required network infrastructure and services have been funded, part of the revenue provides an economic return to the investors who own the network.
This is different from supplier profit
Our analysis of electricity suppliers examined EBIT.
EBIT works well for suppliers because they operate businesses that buy electricity, manage customers, bill households and compete with other suppliers.
Distribution networks are different.
They are regulated monopolies.
Their investment, revenues, expenditure allowances and financial returns are governed through Ofgem’s price-control framework.
For DNOs, therefore, we should ask:
How much do consumers provide?
How much does the network actually cost to operate and expand?
How much is invested in infrastructure?
How much of any efficiency saving is retained by the network?
What return do shareholders ultimately receive?
Together, those questions give us a much clearer picture of economic value than simply quoting a corporate profit number.
£3.8 billion is not £3.8 billion of profit
This distinction is essential.
Britain spent approximately £3.789bn on local electricity distribution networks in 2023/24.
That money paid for real infrastructure.
It funded maintenance, replacement, reinforcement, network operation, new connections, staff, equipment and investment.
Policy Seed is not suggesting that network expenditure can simply be removed from electricity bills.
A reliable electricity system requires substantial ongoing investment.
The question is what happens after the legitimate cost of providing that infrastructure has been accounted for.
Why ownership matters
Electricity distribution is unusual.
These are monopoly infrastructure assets providing an essential service.
Demand for their service isn’t optional: almost every home and business connected to the electricity system requires their infrastructure.
Their revenue is regulated.
Their customers cannot choose a competing network.
And their investors are allowed to earn a regulated financial return.
That makes electricity distribution fundamentally different from most normal commercial markets.
Policy Seed therefore believes it is legitimate to ask whether the current ownership and regulatory structure delivers the best value for electricity consumers.
Efficiency should be rewarded.
Investment should receive a reasonable return.
Networks must have access to enough capital to modernise Britain’s electricity infrastructure.
But consumers should also be able to see clearly how much they are paying, what the infrastructure actually costs, and how much economic value ultimately flows to investors.
The bigger picture
Local electricity distribution is only one layer of the electricity bill.
Policy Seed is examining economic value throughout the electricity system.
That includes:
We have already examined domestic electricity EBIT and shown the operating profits generated after suppliers’ operating costs.
Local distribution networks
This page examines the regulated local monopolies responsible for delivering electricity to homes and businesses.
Electricity transmission
We will separately examine the high-voltage transmission system.
This is particularly important because major new generation can require substantial investment in transmission infrastructure depending on where electricity is generated relative to where it is consumed.
Generation
We will examine the revenues and returns earned by generators.
Support mechanisms
We will examine Contracts for Difference, the Renewables Obligation, the Capacity Market and other mechanisms funded through the electricity system.
System operation and balancing
We will examine the costs associated with keeping electricity supply and demand balanced and managing network constraints.
Only by examining all of these layers can we understand where the money in a British electricity bill actually goes.
The question
Britain needs enormous investment in its electricity networks.
Electrification of transport and heating will place additional demands on local infrastructure.
The objective therefore cannot simply be to make networks spend less.
The objective should be:
Build the electricity network Britain needs at the lowest sustainable cost to consumers while ensuring that the return paid to monopoly infrastructure owners is proportionate to the capital, performance and risk involved.
That requires transparency.
And the first step is following the money.