Ofgem has announced a call for input on the ‘standing charge’ – how it is applied to energy bills and what alternatives could be considered.
The standing charge is a daily charge that you pay your energy supplier each day to cover fixed costs of providing gas and electricity, regardless of how much energy you use. The standing charge is used to recover the costs required to provide energy company services, including providing and maintaining the wires, pipes and cables that deliver power to a customer’s door, through to the staff and buildings required for the energy business to function.
The standing charge is covered by the energy price cap, which sets a ceiling on how much suppliers can charge for it. Energy companies are also not obliged to have a standing charge and can charge less than what is set out in the price cap. There are already tariffs on the market with no standing charge but a higher unit rate.
The energy regulator is now asking charities, consumer groups, businesses, bill-payers and suppliers for their views on the standing charge, and for proposals on alternatives.
Director for Markets at Ofgem Tim Jarvis said “We know that standing charges have provoked a huge amount of debate in recent months and with wider cost of living pressures meaning customers will continue to struggle with bills, now is the right time to look at this again.”
“The standing charge is covered by the price cap, which puts a ceiling on what suppliers can set it. They’re also under no obligation to have a standing charge and can charge less than what is set out in the price cap.”
However, it’s a complex issue and while an upfront set fee to cover a suppliers fixed costs works for some, it doesn’t work for others. Equally, spreading the costs differently might help some but our previous analysis has found it can also penalise some really vulnerable households.”
“So, however we proceed, there is a difficult balance to be struck, which is why it is important as many as people as possible respond to our call for input with their experiences of it, how it affects them and what the alternatives to it could be.”
New Ofgem analysis shows that whilst moving to a charge that reflects how much customers use would benefit low-income households overall, there could be a significant number of customers made worse off. Ofgem household case studies show there are around 1.2 million low-income households with electric heating who use a large amount of electricity and so would be worse off by roughly twice as much as those who benefit.
Historically, customers on prepayment meters (PPM) have paid higher standing charges than Direct Debit customers, reflecting the higher cost to serve of these customers. The Government is currently subsidising PPM customers through the Energy Price Guarantee, to ensure that they pay no more for their energy than Direct Debit customers, but this support is due to expire at the end of March 2024.
Ofgem has been working on a replacement for this scheme and will be publishing a statutory consultation ‘minded to position’ shortly, following positive stakeholder feedback and updated analysis which continues to support the policy.
Bill Bullen, Founder and CEO of Utilita Energy said “Standing charges represent the overheads associated with delivery of energy to households – but the standing charge mechanism is particularly unsuitable for prepay customers.”
“We are keenly aware that PAYG households – who have a closer relationship with their energy usage and spend – feel that standing charges are like a leak in the meter that slowly drains away their credit. That’s why we have always opted for a two-tier tariff as a better and fairer way to recover standing charge costs.”
“Since we launched in 2003 we have never applied a standing charge. Only Utilita customers have been able to pay nothing if they use no energy that day, and we’re popular for it.”
“With standing charges in the spotlight, we fully expect to see more suppliers follow suit until the regulator finds a fairer way to calculate them.”
Energy UK’s Deputy Director, Daniel Portis said “It is unsurprising at a time when bills remain high and customers are trying to do all they can to make savings that standing charges are attracting increased debate.”
“It’s important to recognise that there is a difficult balance to be struck here, as Ofgem says. Standing charges are capped by the regulator and largely cover fixed costs – those which are unrelated to the amount of energy a customer uses. For example, the standing charge is how we all pay for the infrastructure needed to deliver energy safely to our homes because network charges are included, set by the regulator, collected by the supplier and then passed onto the network companies.”
“These costs are incurred by all customers irrespective of the amount of energy they use. If you were to switch these costs to the per unit charges then those customers disadvantaged by the current system, such as low usage households, would benefit but equally other customers who might be more reliant on energy or have a less well-insulated home could end up paying significantly more – including many on low-incomes as Ofgem’s new analysis indicates.
“Although some suppliers have reduced standing charges to help customers where they can, the price cap on the unit rate leaves suppliers very little scope to offer tariffs with low standing charges.”
“Ofgem therefore needs to examine this in detail and introduce any eventual changes with care to ensure that customers in the most difficult situations are still protected. As we’ve said, this issue has been brought to a head because energy bills remain high and it underlines the need to put targeted support in place for those customers in most need this winter and beyond.”