Call to curb network profits to fund standing charge cuts

Stricter regulation of network profits could help cut standing charges in half and reduce household energy bills, a new study shows.

The report, carried out by consultancy Future Energy Associates (FEA), identifies how standing charges for typical dual fuel customers could be cut by 46% from £334.08 a year to £183.02.

It says this could be achieved by reducing the electricity standing charge from £219.42 to £149.17 per year, a 32% drop. And the gas standing charge could be cut by an even bigger 71% from £114.66 to £33.85 per annum.

The study, which was commissioned by the Warm This Winter campaign, has been published against the backdrop of an ongoing Ofgem consultation on how standing charges could be reduced. In addition, the Labour Party has pledged in its manifesto to reduce standing charge levels.

The report proposes a mix of reductions and abolitions of standing charges, while shifting other costs to general taxation or unit rates.

The authors claim this comprehensive strategy should mitigate concerns, previously identified by Ofgem, that shifting costs from standing charges could leave some poorer households out of pocket.

The FEA report recommends reversing the recent shift of distribution and transmission network charge costs from unit rates to standing charges. While a fifth of distribution network charges were covered by the standing charge before 2022, this proportion is now 60%, it says.

And stricter regulation of network companies’ excess dividends could fund a further 10% reduction in standing charges, says the report.

“Network companies should face stricter regulations regarding the dividends they pay their shareholders and the profits they are allowed to accumulate,” the report adds. “This is crucial to ensure that households are not unfairly burdened with excessive costs while these companies continue to generate substantial profits.”

The FEA report also suggests that relatively minor allowances for profits, wholesale price energy adjustments and headroom to cover uncertainties should all be transferred to the unit rate sections of bills as well as payment uplifts and levelling costs.

The report also proposes that the amount of operating costs bankrolled via standing charges should be cut from £133.58 to £53.99 per year by revising the ratio contributed by each element of the bill.

Policy costs, such as those for funding schemes like the Energy Companies Obligation and Warm Homes Discount, should be completely shifted to general taxation, it adds.

This would save customers £142.15 per annum, the bulk of which (£134.25) would come from unit rates, explaining the overall cut in bills identified by the report.

The authors claim their approach promotes both “fairness and energy efficiency, reducing the financial burden on low-consumption households and providing a more equitable pricing structure”.

And they say it addresses concerns expressed by Ofgem that lower standing charges might not aid low income households with high electricity needs due to medical conditions.

The report advocates government support to cover the energy bills of such customers with critical medical conditions, while it says shifting policy costs to general taxation would benefit high consumption households.

Dylan Johnson, one of FEA’s analysts involved in the report, said: “The comprehensive changes we have suggested would bring down standing charges and could also mitigate negative distributional impacts of standing charge reform previously identified by Ofgem. We would urge new ministers to meet with industry, consumer groups and experts to analyse how we can change standing charges in a way that is fair to all households.”

Responding to the report, the End Fuel Poverty Coalition’s coordinator Simon Francis said: “Standing charges are an unfair flat tax on every energy consumer. Every household pays through the nose just to be connected to the grid, even if they use no energy.

“In the past there has been caution about reform due to the potential impact of change on households with a high dependency on energy for medical needs, we still need further detailed analysis of these options by Ofgem to ensure that this group is not penalised.

“However, this report does indicate that reform of standing charges may actually be possible in a fair way. It will need Ofgem, the next government, energy industry and consumer groups to work together to make it happen. The prize of cutting standing charges in half before this winter should be one which new ministers seize upon.”