Standing charges: update on our review
Reports, plans and updates
- Publication date
- Industry sector
- Supply and Retail Market
Overview
The impacts of the global energy crisis are still being felt by families across Great Britain.
While the energy market, and the energy price cap that sets a ceiling for household bills, has stabilised, energy costs are still significantly higher than we have been used to.
At the same time, our energy system is increasingly based on fixed costs, and the question of how those costs are allocated is important. The fixed costs of the wires and the cables that bring energy to our homes, the cost of policies like the Warm Homes Discount, and the customer services of energy companies all need to be paid. As a regulator, we cannot make these costs go away, but we can consider how they could be charged differently.
We expect a future energy system that leaves us less reliant on imported gas will lead to lower bills overall. However, we expect the balance of the bill to change, with some of the fixed costs increasing as we invest to keep pace with growing electricity demand and ensure our infrastructure is fit for purpose.
It was in that context that we set up our review of standing charges and a wider look at affordability and debt in the energy market.
Our call for input on standing charges and our subsequent domestic retail options paper , painted a stark picture. Tens of thousands of consumers responded to express their dissatisfaction with the current system, feeling that standing charges are unneeded, unfair and confusing. Many said that reducing or removing standing charges would make it easier for them to manage their bills, or to pay back and avoid debt.
Balanced against that was the evidence of the risk of harm to some very vulnerable consumers who are high users of energy, often for medical and health needs, if fixed costs were to be moved to unit rates. Citizens Advice and several disability support charities told us of the significant risks involved for some of the most vulnerable households where any charges would result in an increase in unit rates.
In looking at potential reforms, we have looked at both the short-term and longer-term options. Underpinning our work is our fundamental duty to protect consumers – which is particularly important for an area like standing charge reform, where shifting costs to unit rates would benefit some, but likely hurt others.
This update covers three main areas:
- meeting consumer demand for choice around standing charges and the tariffs they have available to them
- ensuring that consumers are properly protected from the downsides of making changes to standing charges now
- finding more sustainable solutions in the long term to how we can balance allocating and recovering the fixed costs of energy investment and delivery
Increasing consumer choice with zero standing charge tariffs
Consumers have been clear that they want to be able to access more tariffs with low or no standing charge. Low and no standing charge tariffs already exist in the market, and there are no clear regulatory barriers to there being more of them. However, these tariffs are not widespread, and switching supplier is not an option for all customers, particularly those in debt. We know that these tariffs might not work for everyone, and we want to look at new options that give consumers more choice in the market.
In early 2025 we will consult on a zero standing charge option within the price cap, alongside the existing tariff. If implemented, this would be available from next winter to anyone who thinks it is right for them and opts to change to this tariff, including with their existing supplier.
There are many different ways this tariff cap could be designed, such as through a block tariff cap where rates change once a certain level of usage is reached. Under all options, the unit rate would include the costs that are currently allocated to the standing charge.
Tariffs under such a cap would likely appeal to those who have very low usage or, as we know from the responses we’ve received, those who simply prefer to have more direct control of their costs.
As part of our consultation, we will look carefully at what consumer protections might be needed, such as how consumers could determine which price cap option (with or without a standing charge) is best for them. We will also need to consider the impacts on suppliers and their ability to recover their efficient costs.
Shifting operating costs from standing charges to the unit rate
In addition to better choice, many consumers expressed their view that the standing charge should be reduced or abolished, and costs shifted to the unit rate.
We have already acted to make standing charges for prepayment meter customers the same as those paid by Direct Debit customers, and in 2025 we will review how effective this has been.
In our options paper in August 2024, we outlined the impacts of moving £20 to £100 of supplier operating costs from standing charges to unit rates. We sought views on what might be needed to mitigate any impacts.
At the same time, we have been carrying out our review of suppliers’ core operating cost allowance. Through that review we are proposing to simplify the allowances and implement an overall reduction of roughly £10 to standing charges.
A further shift of operating costs would provide a net consumer benefit – but the costs and benefits would be unequally felt. A large number of consumers would see a relatively modest benefit, but a smaller number of consumers would see a very large cost. Low-income consumers sit on both sides of this divide.
Many low-income or vulnerable consumers could be hurt by a change in how standing charges are allocated. This could be because of non-negotiable high energy needs, which would mean that any increase in the unit rate could be detrimental to their affordability and ultimately their health and wellbeing. By keeping these costs in the standing charge, these consumers are protected from the negative impact higher unit rates would cause.
Case studies
Marie Curie highlighted that a household that includes a person with a terminal illness may see their energy costs increase significantly: by 6.9% above average if they have an electric bed, 15.8% if they are receiving at-home dialysis, 20.5% if they are a ventilator, and as much as an extra 37.8% more than the average household if they are receiving oxygen concentration.
In its ‘One Charge Too Many’ paper, Marie Curie shared the story of Emma, who uses a stair lift to get around their home, an electric wheelchair, a small refrigerator for medication, and needs extra heaters and fans. Their energy bills have doubled and that it made it very hard in the winter, when Emma spent most of the time in bed.
Another person, Jacqueline, said ‘My electric wheelchair, nebuliser and powered hospital bed make my mobility so much easier to deal with, but we have had to really cut back on other things, such as food, to pay for the increased cost.’
These stories illustrate the reality for some households, and moving more costs from the standing charge to unit rates would make their affordability challenges worse. For consumers like these, the way standing charges are currently allocated is more effective at supporting their ability to pay for the energy they need.
Our position is that we should not, at this stage, change the default position for all customers. It risks vulnerable households such as those highlighted in these case studies facing significant losses. We will continue to work with government to explore what protection for these households could enable us to revisit this option in the future.
But these case studies also highlight that there is not a balance between standing charges and unit rates that will be better for everyone and targeting support on those who may lose out is complex. That is why we are looking at options beyond a single default for all customers.
Future composition of energy bills
Alongside changes we can make in the short term, the conversation on standing charges has brought out a wider issue about how bills might need to change in the future.
As we reduce our reliance on gas for generating electricity over time, unit rates should get cheaper. But there will be new fixed costs as we invest in new energy infrastructure, and therefore the balance of bills will change between fixed and variable costs. This means we need to think about the underlying way that different parts of the industry recover their costs and how this translates into consumer bills.
We have set up a new project to review and assess the recovery of system wide energy costs, such as electricity and gas network costs. The project will develop proposals that balance efficiency, fairness, and simplicity in future charging and pricing models as we protect existing and future consumers through the increased investment our energy system needs in the coming years.
We expect that the review will consider the mix between standing charges and unit rates, the relationship with consumers’ ability to pay, and how pricing should reflect the additional cost that high energy needs can create. Alongside this, we are also considering whether the regional differences in standing charges should remain or whether there is a different option that would better protect consumers overall.
This work will take some time as it’s important that we make the right decision on how these costs will be recovered. This work contributes to Ofgem working with government to deliver an energy system which is fairer and affordable for consumers. We will publish further details on our review in early 2025.
Next steps
We understand that consumers are still facing affordability challenges, and many want to have more control over their energy bills while also seeing a change in how they contribute to fixed costs. We have set out a path that would enable consumers to choose the option that is right for their circumstances, while ensuring we strike the right balance in protecting consumers by retaining the benefits of a system where fixed costs allow lower unit rates that are vital for some particularly vulnerable people.
As we look to the future, we will continue to be mindful of the impacts our actions could have, particularly on low-income and vulnerable consumers.
We look forward to continuing to engage with consumers and stakeholders as we take forward our next steps.