Ofgem has published an update on its review of standing charges, after responses to its call for input painted a “stark picture” of users’ dissatisfaction with the current system.
According to the regulator, tens of thousands of consumers expressed dissatisfaction with the current system, stating standing charges are “unneeded, unfair and confusing”.
The UK energy system is increasingly based on fixed costs, dictated by things like the cost of infrastructure, policies like the Warm Homes Discount and the customer services of energy companies.
Ofgem launched its call for input and review in response to the fact that some of these costs are increasing as the demand for electricity increases, necessitating infrastructure upgrades.
Balanced against consumer responses that called for reduced standing charges or their removal altogether, Ofgem said it received evidence that there would be a risk of harm to vulnerable consumers who are high energy users due to medical and health needs.
Citizens Advice and several disability charities said any charges would result in an increase in unit rates.
Ofgem’s 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
Low and no standing charge tariffs already exist in the market but they are not widespread and can require a change of supplier, which is not accessible for all customers, particularly those in debt.
Ofgem said it wants to look at new options that give consumers more choice in the market and in early 2025 it will consult on a zero standing charge option within the price cap (which Cornwall Insight recently predicted would increase again in April).
If implemented, the new tariff would be available from next winter to anyone who opted to change to it.
According to Ofgem, 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.
As part of the consultation next year, Ofgem will look at what consumer protections might be needed and the impacts on suppliers and their ability to recover their efficient costs.
Moving operator costs to unit rate
Ofgem will also consider shifting operator costs to unit rates. The regulator has already made standing charges for prepayment meter customers the same as those paid by Direct Debit customers, and in 2025 will review how effective this has been.
Ofgem has also been carrying out a review of suppliers’ core operating cost allowance, proposing to simplify the allowances and implement an overall reduction of about £10 from standing charges.
Further shifting operating costs would have provide a net consumer benefit but the costs and benefit would not be equally felt, Ofgem said. 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.
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.
As such, Ofgem does not want to change the default standing charge position for all customers but will continue working with the government to explore what protection for low income and vulnerable households could enable it to make the changes at a later date.
It noted that because there is not a balance between standing charges and unit rates that is better for everyone and as such Ofgem will look at options beyond a single default for all customers.
The future of energy bills
Ofgem has also acknowledged that in the longer term bills will have to change: as reliance on gas is reduced, unit costs will go down but there will be new fixed costs as investment is made in new energy infrastructure.
How different parts of the industry recover costs will have to be addressed. To that end, Ofgem has set up a new project to review and assess recovery of system-wide costs and develop proposals that balance efficiency, fairness, and simplicity in future charging and pricing models.
Ofgem said 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.
Caroline Simpson, a spokesperson for Warm This Winter, a campaign by a coalition of over 40 UK charities to make energy affordable, said: “It’s good to see billpayers being given more choice but as the latest forecast price cap rise means energy bills will be 70% above what they were in winter 2020/21 we need long term solutions.
“A comprehensive insulation programme is the quickest and easiest way to bring down bills permanently because in real terms the average household is paying more than £750 extra to use similar levels of energy as a few winters ago.
“We urge the Government to get on with the job they have started on that road to permanently lowering bills for all.”
