Ofgem has published a ‘call for input’ on the ‘standing charges’ applied to energy bills and what alternatives could be considered.
The daily standing charge covers the fixed costs of providing gas and electricity, recovering the costs required to provide energy company services – everything from providing and maintaining the wires, pipes and cables paying staff and buildings required for the energy business to function. The charge can currently vary from region to region because of the differing costs in supplying energy to a particular area.
Campaigners against the charge say that imposing the same standing charge on large and small users is not the fairest way to recover the cost, especially for consumers who struggle to pay their bills. There are concerns that daily charges mean energy debt can increase even as customers try to reduce their usage.
The energy price cap is set separately for gas and electricity and both are limited under the energy price cap. 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.”
Ofgem says its analysis shows that whilst moving to a charge that reflects how much customers use would benefit low-income households overall, some would be disadvantaged. For example around 1.2 million low-income households with electric heating who use a large amount of electricity and 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, 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.
Meanwhile the government is set to consult this autumn on whether to change how the costs of various energy schemes falls on consumer bills. Environmental and social programmes are currently charged back to customers via electricity bills, but that raises the cost of using electricity compared with fossil gas, disadvantaging customers using green energy. The government is considering switching some charges to gas bills.
The Standing Charges – Call for Input on standing charges is open until Friday 19 January 2024.