Energy standing charges to hit record highs

Standing charges on energy bills are set to hit record highs following the latest price cap update, disproportionately affecting low-income households, a new report has found.

The report, produced by Ideal Economics, was written by former Ofgem senior economist David Osmon and commissioned by National Energy Action (NEA).

It warns that from 1 April standing charges for dual fuel prepayment meter (PPM) customers will increase to £350 per annum, the highest level yet and £50 more per year than those who pay by direct debit.

It explains that those on low incomes spend less on energy, meaning a higher proportion of what they pay goes on the standing charge, buying them no energy.

The report further explains that a yearly standing charge of £350 accounts for 41% of what those in the poorest 10% of households have available to spend on energy and leaves them with only £508 worth of gas and electricity every year.

Osmon heavily criticised the energy regulator and said the £200 million government intervention to bring standing charges for PPM customers in line with those on comparable direct debits from July “is a direct response to Ofgem’s questionable current approach to setting the price cap”.

“It has been Ofgem’s deliberate policy to raise standing charges and lower unit rates,” he added.

Osmon criticises the decision by Ofgem in 2020 to revoke price cap rates for smart prepayment customers which were set at the same level as those paying by direct debit, with the standing charge then being set significantly higher for PPM customers.

This change, he added, coincided with the removal at the end of 2020 of the ‘Safeguard Tariff’, a price cap for PPM customers.

Level of dual fuel annual standing charges in price caps before and after removal of the Safeguard Tariff (incl. VAT) Table from Ideal Economics report

        Source: Ofgem

“It is egregious that the appropriate protection for those with smart prepayment meters was removed and these customers subject to higher charges seemingly without justification or explanation,” said Osmon.

He further criticised Ofgem for adding some network costs that were previously recovered through the unit rate, as well as some of the costs involved in the Supplier of Last Resort process, to the standing charge.

“Ofgem’s justifications for these decisions appear flawed and contrived,” he said

It comes as NEA figures reveal the number of UK households in fuel poverty is set to increase from 6.7 million to a new high of 7.5 million from 1 April.

Osmon said: “Forced prepayment installations have been widely condemned but the fact that prepayment customers pay significantly more than other customers because their standing charges are so high has attracted less attention.

“The government is spending £200 million of tax-payers’ money to take the edge off this for nine months but the sharp increase in standing charges in recent years is the result of a series of policy decisions by Ofgem, which have consistently favoured the energy companies over the interests of the most vulnerable consumers.”

Adam Scorer, NEA chief executive, added: “For years, the standing charge has been growing. It makes life worse for low-income households who cannot afford the cost of a warm, safe home and have no choice but to cut back on their energy consumption.”

“The regulator controls how costs are passed through to consumers. We know that low-income households lose out the most from its default approach to standing charges. It is high time for change,” he added.

An Ofgem spokesperson said: “Following a review of one part of electricity standing charges covering the cost of supplier failures (SoLR costs), we looked long and hard at whether moving the costs from standing charges to usage was the right thing to do, but the numbers just didn’t stack up.

“Our analysis shows it would disproportionately negatively affect some of the most vulnerable consumers who use high amounts of energy and are least able to reduce their use, such as those with disabilities and the elderly, while resulting in minimal savings for those it would benefit – around just £1 a month.

“This remains a worrying time for people across the country and we recognise the challenges many are facing. While this was specifically in relation to recovering SoLR costs, we will continue to keep standing charges under review and consult widely on any possible future changes.”

A Department for Energy Security and Net Zero spokesperson said: “We know this is a difficult time for families, which is why the government is covering around half of the typical household’s energy bill.

“Our Energy Price Guarantee scheme ensures that even if standing charges change, the typical household’s overall bill does not increase.

“Standing charges are also capped by Ofgem, the regulator.”