Ofgem concedes standing charge reforms could hit customers

Ofgem has warned that a “significant number of customers” could be made worse off if standing charges are amended to reflect usage.

It comes as the energy regulator has today (16 November) published a call for input on how the standing charge is applied to energy bills and what alternatives could be considered.

When it previously looked at the issue prior to the energy crisis in 2021, Ofgem found “a complex situation where there are winners and losers”.

“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,” it explained.

The charge, it added, can also vary depending on location because of the differing costs in supplying energy to different regions.

Yet the regulator has issued a warning about the findings of new analysis it has undertaken which shows that some lower-income consumers could be detrimentally impacted by certain changes to the standing charge.

It said: “New Ofgem analysis shows that whilst moving to a 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 household case studies show there are around 1.2 million low-income households with electric heating who use a large amount of electricity and so would be worse off by roughly twice as much as those who benefit.”

The regulator’s director for markets, Tim Jarvis, said “now is the right time” to look at standing charges again.

He added: “The standing charge is covered by the price cap, which puts a ceiling on what suppliers can set it (sic). Suppliers are 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.

“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.”

Prepayment meter (PPM) customers have also paid higher standing charges than those paying by direct debit historically, owing to their higher costs to serve. The government has been subsidising PPM customers via the Energy Price Guarantee to align their costs with direct debit customers, but this is due to end in March next year.

Ofgem said a statutory consultation on its proposed replacement for the scheme will be published shortly.

The call for input on standing charges is open until Friday 19 January 2024.