Changes to standing charges should leave no one behind
We support a review of standing charges to make the system fairer for all households, and would like to see it as part of a holistic approach to protecting vulnerable energy customers.
Standing charges have more than doubled for domestic consumers since 2021, and 70% of this increase is due to the network costs that help run, maintain, and upgrade energy infrastructure. From October 1st, when the new price cap will introduce another marginal rise, customers can expect to pay roughly £6.50 on average in standing charges for gas and electricity each week.
There are concerns that these increases have a greater impact on lower income consumers and, because they are fixed, could be disproportionately high for those who use less electricity. This has prompted some stakeholders to ask that Ofgem takes action on limiting standing charges, and potentially even abolishing them.
We fully support a review of standing charges so that they don’t disproportionately burden less affluent households, but we would go a step further. Our priority is and should be protecting the most vulnerable energy customers wherever they need it, and we would like to see any review or reform go beyond standing charges to offer more comprehensive support for people who can’t afford to pay their bills.
The difference between fixed and variable charges
Customers’ energy bills do not only cover the energy they use, but a range of important additional costs that allow generators, the grid, and suppliers to keep operating. These costs are unavoidable, and go towards things like upgrading and maintaining the network to meet the country's net zero goals, but they are also broadly unaffected by variables such as energy market fluctuations, meaning they are fixed.
These and other predictable outgoings like the operational cost to suppliers of serving each customer are often included in the fixed standing charge, whereas unit prices are calculated according to the unpredictable cost of wholesale energy, and can therefore be variable.
Important to remember is that the fixed operating costs of running the network and serving customers are a necessary part of providing energy. Network costs, for example, come to around £11 billion a year, and balancing the system costs an additional £4.5 billion. One way or another, these costs must be included in people’s bills. The question is whether that is as a fixed standing charge, a variable unit rate, or some other form of tariffs.
The impact of passing on fixed costs as a unit price
We support an evidence-based review of standing charges and are fully open to reforming them if it’s in the best interests of our customers, but any changes should make up part of a wider review of affordability that considers the needs of everyone.
The most obvious alternative to standing charges would be to factor necessary network and operational costs into a single unit rate. As a simplified example: If a supplier’s fixed costs came to around £100 per customer per year, instead of passing this on as a standing charge they might divide that £100 by the average number of units a UK household consumes annually and add that to the cost-per-unit.
For households that consume more or less the average number of units this would prove fair, but it could have a disproportionate impact on customers whose usage varies from the norm. Potentially vulnerable groups such as renters and those without the means to make their homes more energy efficient, people in rural areas, households reliant on electric heating, and those who require energy-intensive medical treatments and assistance such as at-home dialysis are all liable to consume more energy than the average customer. This means they will effectively be overpaying once their usage exceeds a certain level.
On the flip side, there is also a risk of under-recovery: if a significant number of people use less energy than expected and suppliers face a deficit when paying essential network costs and other operational expenses, this could potentially lead to the kind of market instability that was a contributing factor to the rise of standing charges to begin with.
Changes to standing charges should leave no one behind
Because our priority is ultimately our customers, and especially those who are most vulnerable, we think it’s worth recognising that high standing charges could also have a disproportionate effect on a minority of consumers, notably those who use very little energy and are still asked to pay regular fixed tariffs.
We support a review of standing charges and measures that will bring down the cost to customers wherever possible, but we believe that any changes to the current system should be designed to leave no one behind. That’s why we are keen to work with Ofgem and the government to make sure that any review or reform of the way network and operational costs are recovered by suppliers is evidence-based, fair, and leads to better outcomes for all customers regardless of their income or how much energy they need to use.