Energy regulator Ofgem has launched a review into energy bill standing charges following months of debate over whether they exacerbate cost of living pressures for low-income households.
Under the current system, the regulator’s price cap sets the maximum level suppliers can charge for the flat daily fee. This is what you pay for being connected to mains supply.
This charge has risen by over 65% in the last five years, with an average household currently paying 53p a day for electricity and 30p a day for gas under the October price cap. This adds £300 to an average annual bill.
Ofgem will be consulting consumers about how they’d like to change the current system (more on this below).
Editor in chief of Look After My Bills, Gary Caffell said: “It’s good Ofgem has finally listened to the calls and is now consulting on these sky-high standing charges. Households having to pay £300 a year just for the privilege of being connected to the grid doesn’t sit right.
“It is a barrier for those who are trying to save on their bills by cutting back on their use. No matter how little people use, they still have to fork out £300. While reducing these standing charges is absolutely the right thing to do – and we look forward to the outcome of the consultation – Ofgem needs to also make allowances for those who have high consumption due to medical needs. They can’t be left worse off.”
It comes as the energy crisis looks set to continue well into 2024, with the Ofgem energy price cap forecast to rise from January. The situation means money saving energy deals are currently thin on the ground. See our energy deals comparison guide for more info.
What are standing charges and why are they controversial?
The standing charge is used to recover the costs required to provide your energy supply. This mainly includes providing and maintaining the wires, pipes and cables that deliver power to your home. There is also an allowance for policy costs, operating costs, and to recover losses as a result of the number of suppliers that went bust at the start of the energy crisis.
Under the current Ofgem energy price cap, you pay a maximum of around 83p a day in standing charges (if you have a dual fuel household). Here’s what the current rates look like for gas and electricity:
|Energy Price Cap rates from 1 October to 31 December 2023||Old Energy Price Cap rates from 1 July to 30 September 2023|
|Gas||Unit rate: 7p per kilowatt hour (kWh). Standing charge: 30p per day||Unit rate: 8p per kWh Standing charge: 29p per day|
|Electricity||Unit rate: 27p per kWh. Standing charge: 53p per day||Unit rate: 30p per kWh Standing charge: 53p per day|
Standing charges are a controversial topic for two main reasons:
- The way they are applied
- Their overall cost.
On the first issue, they contribute to your energy bills every day, regardless of whether you’ve actually used any gas or electricity. It means a dual fuel household can expect to pay around £300 a year before using any energy. This means those who want to cut bills by using less energy, see less of a benefit.
Standing charges are also the same for everyone, regardless of your income. It means there’s a perverse situation where poorer households are paying towards support policies intended to help them.
These vulnerable people are also hit if they have a prepayment meter. If you run out of money and cannot pay for your bills – a situation that can lead to you getting temporarily disconnected by your energy supplier – standing charges continue to apply. It means you will be racking up debt despite not using any energy.
On the second point, standing charges have risen significantly in recent years. According to a September 2023 report by MPs who sit on the Energy Security and Net Zero Committee, the fees have risen by 65% in less than five years. Despite this, there’s a lack of easily available information on what they are used for by energy companies.
So, for these reasons, the current standing charge system is quite clearly imperfect. But Ofgem says the solution could be complex.
What has Ofgem said about standing charges?
Ofgem says it’s consulting about standing charges largely because of the “cost of living pressures” consumers are under. But it has also warned that there’s no simple answer to the problems these fees present.
The energy regulator says it has analysed how moving to a charge that reflects energy use would play out. It says its findings were that low-income households would benefit from such a system. But its research also found that a “significant” number of vulnerable people using electric heating would be made worse off by twice as much as those who’d benefit.
Director for markets at Ofgem, Tim Jarvis, said: “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 could be.”
Ofgem’s previous review of standing charges in 2021 found there would be winners and losers if it made any changes. It said suppliers would have to cover “reasonable costs” in other ways, namely charging higher unit prices.
Does the news affect my energy bills?
At the moment, Ofgem’s review into standing charges will have no effect on what you pay for your energy. At this stage, it’s just a consultation.
It means the regulator is seeking the views of everyone who has skin in the game when it comes to energy bills. This includes: charities, suppliers and bill payers. It says it’s going to do this until January 2024, after which it will make a decision about whether to change the standing charges system or keep it as it is.
A previous review in 2021 opted not to adjust the system, so there are no guarantees anything will happen. If, however, Ofgem does decide to rip up standing charges, it wouldn’t be likely to change your bills until spring or summer 2024.