Energy regulator Ofgem yesterday (16 November) launched a review into standing charges, how they are applied to energy bills and what alternatives could be considered for consumers.
The organisation is calling on charities, consumer groups, businesses, bill-payers and suppliers to offer their views on the standing charge and for any proposals on alternatives. All groups have until 19 January 2024 to respond.
The standing charge is a daily charge that energy users pay their suppliers in order to cover the fixed costs of providing gas and electricity, regardless of how much energy is consumed. The charge differs based on where in GB the consumer is based.
The cost is set by the energy supplier and is included in the energy price cap, which Ofgem reviews and sets every three months. And, with Cornwall Insight’s latest Q1 2024 forecast predicting a 5% rise to £1,931 for a typical dual fuel household, Ofgem believes it is the “right time” to revisit the charge.
Energy companies are not obliged to have a standing charge and can charge less than what is set out in the price cap, something Octopus Energy did late last year as the energy crisis started to bite.
For context, the charge covers various costs such as maintaining the energy supply network, taking meter readings and providing support for government social schemes, such as helping vulnerable households and environmental schemes.
From the start of October, the standing charge has sat at 53p per day for electricity and 30p per day for gas.
“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,” said Tim Jarvis, director for markets at Ofgem.
“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.”
Jarvis concluded: “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.”
Changes to standing charge could see ‘winners and losers’
This is not the first time Ofgem has looked into standing charges, with a review prior to the energy crisis having revealed a “complex situation where there are winners and losers”.
For instance, the energy regulator highlighted that “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”.
Whilst moving to a standing 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 said, with their case studies having revealed that there are around 1.2 million low-income households with electric heating that use a large amount of electricity.
The result could see them worse off by roughly twice as much than those would benefit from the removal of the standing charge.
There is also the predicament surrounding prepayment meters (PPM). Historically, those on a PPM have paid higher charges than those that pay via direct debit, which reflects the higher cost to serve these homes. The government is currently subsidising PPM customers via the Energy Price Guarantee, however this support is set to end in March next year.
Ofgem revealed today that it has been working on a replacement for this scheme and will be publishing a statutory consultation shortly.
PPMs have been subject to controversy throughout 2023, with energy suppliers having agreed to stop forcing vulnerable households onto PPMs, following former energy security secretary Grant Shapp calling for an investigation into PPM exploitation in February.
The result saw Ofgem update the Code of Practise for PPMs with all energy suppliers signing this modification. The changes were confirmed to be in place from 8 November.
This change was spurred by evidence that 3.2 million people were cut off from their energy supply last year for being unable to keep up with their PPM payments; these figures were exacerbated as PPM installations rose considerably during the energy crisis.