As electricity travels across the transmission and distribution networks from where it is generated to where it is consumed up to 10% of it is “lost” – typically in the form of heat. We recently estimated that from October 2022, across transmission and distribution, losses would be costing a typical household around £100 pa. This blog explains how we reached that figure and our calculations. 

In our responses(1) to successive Ofgem consultations on the distribution network price control (RIIO ED2), Sustainability First has stressed the need for more focus to be put on losses. We recently estimated that from October 2022, across transmission and distribution, losses would be costing a typical household around £100 pa.

Losses are also hugely significant in carbon terms, accounting for 90% of the distribution network’s carbon footprint. And, as with energy efficiency generally, losses also matter as they impact on the amount of renewable generation capacity we need to build to achieve net zero.

Putting a precise figure on the cost of losses is complex. We have not found any official estimates. In our view, this illustrates the lack of focus on the issue. Our own estimate has varied slightly in our successive responses to Ofgem consultations.

This note therefore sets out the basis for our £100 p.a. estimate to help take the debate forward and allow Ofgem and other interested stakeholders to understand our calculations. 

Our figure is based on the costs underlying the price cap that Ofgem had set for October 2022. The recent announcement by the Prime Minister on the new energy price guarantee means that the average bill from October 2022 will now be fixed at £2,500 p.a. for the next two years. Households will now pay less than the full cost of their energy over that period. Government (i.e. taxpayers) will make up the cost-shortfall against the Ofgem benchmark. The price guarantee does not change the underlying cost of the losses, just who pays for them. 

The attached technical annex sets out the basis for our £100 p.a. estimate. It references the specific lines in the Ofgem October 2022 price cap model from which we took the data. (As a result, this annex will only be meaningful for those familiar with the detail of the Ofgem spreadsheets).

In summary, the model includes an uplift for transmission and distribution losses of around 10%. We applied this losses percentage to the wholesale electricity costs in the Ofgem model (of just over £300/MWh) and multiplied by the typical domestic consumption values that Ofgem uses.

There is much complexity in the assumptions which underpin any such estimate and the relevant figure of course depends on the use to which it is to be put. In this context we would note that:

• While our figure reflects total losses across transmission and distribution, for the distribution price control what matters are losses on the distribution network. These currently average around 7% - although all DNOs are anticipating that their losses will increase over ED2 (potentially quite significantly) as a result of greater network utilisation;
• Our figure is based on the cost of wholesale electricity taken from Ofgem’s price cap model - which lags what is actually happening in the market. The October 2022 price cap was based on (forward) wholesale prices from April to September 2022. Commentators had been expecting a further increase in the quarterly price-cap in January.

• Clearly, from the standpoint of Ofgem allowing funding in the ED2 price-control, it would not be appropriate to make decisions on long term investments based on current exceptionally high price levels – as of course longer term we all hope costs will return to more normal levels. However, in cost-benefit terms, the current high price can be relevant if what is being considered is pulling forward investment needed in the near future (and which would help reduce losses now) or other short-term operational actions. 
• As highlighted in our response on Ofgem’s distribution price control (and as flagged by a number of the networks in their Business Plans) losses are much higher at peak times. Hence losses should be valued using the cost of energy at peak times rather than the average-cost figure that Ofgem uses (and which therefore our figure is also based on). Getting a better handle on the time-of-use aspect of losses is one of our key recommendations and could be expected to further strengthen the case for action on losses.

Financial incentive

Given the cost of losses – and the wider considerations of carbon, whole system and energy security - we believe Ofgem should be sending a much clearer message to the distribution networks about the importance of continuing to look for ways to reduce the losses on their networks and to improve measurement and monitoring.

While some of this is about upgrading the infrastructure (where cost effective to do so) there are also operational steps the companies can take to balance loads across their networks or to switch off unused equipment, for example.

And with the roll-out of smart meters and far more monitoring equipment on the low voltage networks in ED2, there is scope for much improved analytics and hence a better understanding of where, when and why losses arise. However, without a clear incentive in the ED2 price control we are concerned that such actions will simply not be a priority for network company managements.

We had very much hoped to see a financial incentive to encourage DNOs to tackle losses. Absent this, Ofgem should produce or commission an annual report looking at how the companies are delivering against their Losses Strategies (including building understanding and sharing knowledge). This should rank DNO performance to ensure the proposed reputational incentive has teeth. Ofgem has the ability to take enforcement action against companies that are not complying with their licence obligations on loss management and should be ready to do so.

We also believe funding should be provided to enable network companies to pursue actions that may not have been justified at the time they submitted their ED2 Business Plans but which would now be justified given the significantly higher cost of carbon that BEIS announced in 2021 (to be consistent with net zero) and also given higher energy costs.

There is also a clear role for the electricity System Operator to understand the expected increases in losses and reflect them in its future capacity projections and to ensure that actions to address losses are considered from a whole system perspective.

We know from customer research as part of ED2 – plus well-known customer attitudes to water leakage – that customers really dislike what they perceive as “waste”. By highlighting the cost of electricity losses at this critical time of high prices we hope to encourage everyone – Ofgem, BEIS, networks and the supply chain – to look creatively at what more can be done to improve losses management. 

Technical annex: Calculation of Losses £100 pa figure (Based on Oct 22 Price cap) 

Except where stated figures are taken from Ofgem’s October default tariff cap model

From Annex 2: Wholesale Energy Costs

Sheet 1b)   £ / MWh at NTS (inc shaping etc) – rows 26/27

Profile class 1: £312.43

Profile class 2: £307.09

Sheet 3c) Losses % – national average rows 39/40

Profile class 1: 9.8%

Profile class 2: 9.7%

Annual demand (TDCV – Benchmark usage in model) in kWh:

Profile class 1: 3100

Profile class 2: 4200

Multiply £/MWh * losses % * demand /1000

Profile class 1: £94.92

Profile class 2: £125.11

Weight Profile class 1: Profile class 2 in ratio 86:14 

(based on annex to TDCV methodology 2019 open letter which says 14% of meter points are Profile class 2)

= £99.15