Ofgem sticks with flat charge for electricity SoLR costs

Ofgem has decided against shifting the costs of supplier failure from electricity standing charges to a usage-based approach, following concerns about the impact it would have on vulnerable customers.

Supplier of Last Resort (SoLR) levy costs are currently at “unprecedented” levels following a string of retailer failures over the last year.

The regulator has approved more than £1.8 billion in Last Resort Supply Payment (LRSP) claims to be recovered by the SoLRs, £1 billion of which is set to be recovered from electricity customers.

There is currently no link between electricity consumption and contribution to SoLR costs, meaning all electricity consumers make the same contribution.

However, market conditions were much more benign when this rule was approved in 2019. Ofgem said the current level of SoLR costs equates to just over £34 per domestic consumer in the year April-March 22/23, versus typical levels of pence per year previously.

Ofgem had been mulling whether to amend the methodology to recover SoLR costs based on the amount of energy used following concerns about increases in standing charge levels allowed under the default tariff cap.

However, some consumer groups such as Citizens Advice highlighted how volumetric charging could disproportionately impact customers with protected characteristics, such as disabled customers who require high levels of energy use to keep their homes at a certain temperature, or to charge electric equipment such as wheelchairs.

Following its review, Ofgem chief executive Jonathan Brearley has written an open letter in which he outlined the regulator’s decision not to push ahead with the changes.

He said: “Overall, the review showed that recovering supplier failure costs through unit rates may lead to small reductions in bills for some low-income consumers, however, these savings are relatively small in the context of overall bills and would be at the cost of increasing charges for some high consuming customers many of whom are vulnerable.”

A table published in the letter highlights how large numbers of higher consuming customers, including those who are vulnerable, would pay between £5-£30 more under a volumetric methodology compared to the current approach.

There were also concerns about the impact a volumetric charge may have on prepayment meter customers given their typical electricity consumption is higher than average.

Brearley said Ofgem believed that volumetric charges “do not represent an effective way of dealing with particular concerns raised surrounding low-income customers, or prepayment customer self-disconnection”.

“We also consider that the impacts on high-consuming customers, particularly where users have greater energy use as a result of vulnerabilities such as disability or health conditions, are not desirable. Given the short period of time before the next price cap period, we do not consider it would be feasible to produce effective mitigation for the expected impacts,” he added.

In January, Ofgem approved a modification to the Uniform Network Code designated UNC0797 that sought to apportion gas-related SoLR costs to the market segment in which they arose through a new volumetric charge.

The modification, which came into effect at the beginning of April, was intended to prevent the cross-subsidy of domestic customers by non-domestic customers and vice versa. The regulator chose this in favour of an alternative modification, which would have achieved the same aim through a flat charge per meter.

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