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Every energy supplier will be required to offer energy tariffs with low or no standing charges so customers can choose to pay these costs as part of the unit rate, under plans published by Ofgem.
The regulator has launched a consultation on how proposals to introduce an option under the price cap that will cover zero standing charge tariffs, where the fixed costs covered by standing charges would shift to unit rates, could work in practice. Ofgem’s proposal is for these tariffs to be available for next winter (2025/2026).
Standing charges cover the fixed costs of delivering energy to peoples’ homes and businesses, including the cost of essential maintenance and infrastructure upgrades. Tens of thousands of consumers responded to Ofgem’s call for input and asked for standing charges to be removed altogether, saying that reducing or removing standing charges would make it easier for them to manage their bills or pay back debt.
However the regulator is clear that it cannot remove the costs that make up the standing charge from the system, it can only moved from one part of the bill to another. This means that tariffs without a standing charge will have a higher unit rate. These may be better suited to those who are low energy users but will not automatically equate to a cost saving for all consumers.
Options under consideration for zero standing charge tariffs include tariffs with a single unit rate, meaning the same unit rate would apply at all levels of energy consumption. Falling block tariffs, where customers would pay a higher unit rate until a certain amount of energy is used, and then a lower rate thereafter. Also, rising block tariffs, where customers pay a lower unit rate until a certain amount of energy, and then a higher rate thereafter.
Charlotte Friel, Director for Retail Pricing and Systems at Ofgem, said “We know from the huge response we’ve had that many feel standing charges are unfair. However, we also know that vulnerable, high-energy users – including those who rely on medical equipment at home or low-income families in poorly insulated houses – would suffer disproportionately if these costs were added to the unit rate for everyone.
“That’s why we’re moving forward with plans that will give customers a choice and more control over how they choose to pay for their gas and electricity.
“We’re looking closely at how these tariffs will work in practice, but everyone will need
to carefully consider which option best suits their needs. The costs included in the standing charge ultimately have to be paid. But while they may not save everyone money, they will give people a choice, and greater control over their bills.”
Alongside options for how zero standing charge tariffs could be structured, Ofgem is also considering if minimum usage requirements are needed to ensure the basic costs of supplying energy to homes or businesses are covered. This would also ensure essential costs currently included in the standing charge are paid fairly by all customers.
The consultation follows an options paper published last year on a number of short-term options to reduce the standing charge. However, Ofgem warned that there was evidence of the risk of harm to some customers in very vulnerable circumstances who are high users of energy, often for medical reasons, if the fixed costs currently
Energy UK’s chief executive, Dhara Vyas said “Introducing a new, alternative price cap option increases its complexity and should be very carefully considered given the potential risks to customers.
“At the moment, a single price cap offers a safety net for customers giving them price protection whatever their level of engagement. However, under these proposals, customers would have to make an active choice about which price cap tariff they should be on. We are concerned that it will be very hard to avoid some households, especially those in vulnerable circumstances, paying the price by ending up on the wrong tariff.
“Having two price caps in place – one of which might involve different unit rates and a minimum usage requirement – will be difficult for customers to understand, complex to implement, and will increase the challenges and risks for suppliers that come from buying energy in advance. Given that some of these proposals are at an early stage, it’s questionable whether bringing them in by next winter is either possible or desirable.
“Standing charges cover costs that are incurred by all customers irrespective of the amount of energy they use – including paying for the infrastructure necessary to deliver energy safely to our homes through network charges. These costs need to be recovered – either through the standing charge or via higher unit rates – and doing so in a way that is fair to all customers is a difficult balance.
“The huge challenges involved with implementation – and the associated risks – means that we should look long and hard at whether these proposals will deliver a significant overall benefit to customers, especially the households who are struggling the most with the cost of energy, in comparison to the urgent need to tackle record customer debt level and bring in targeted bill support.”