Ofgem opens up conversation on energy standing charges, ahead of winter
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A call for input on the ‘standing charge’ – how it is applied to energy bills and what alternatives could be considered – has been launched today by Ofgem.
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.
Today’s call for input is the first time since before the energy crisis of 2021 that Ofgem is explicitly reopening the public debate around how the standing charge is spread between customers and what any alternative could look like.
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 looked at the issue of standing charges before the energy crisis, with findings revealing a complex situation where there are winners and losers.
If the standing charge facility was scrapped, suppliers would still have to cover their reasonable costs in other ways, which would mean charging a higher price for every unit of power used.
The charge can also currently vary from region to region because of the differing costs in supplying energy to a particular area.
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.
The call for input on standing charges is open now until Friday 19 January 2024, and Ofgem is interested in hearing ideas from any interested parties.
The next price cap update from Ofgem will be published on Thursday 23 November 2023.
We welcome the views of any energy customer to be sent to StandingCharges@ofgem.gov.uk by Friday 19 January 2024.