‘Tinkering’ with standing charges could have unintended consequences

Short-term “tinkering” with standing charges could have unintended consequences for some vulnerable consumers and risks being a distraction from the “very real problems” they face.

Reducing the charges could see energy bills rise “at the worst possible time,” while handing “unfair windfalls” to more affluent households, Citizens Advice has warned.

Writing in a blog, Alex Belsham-Harris, principal policy manager at the charity, said although gas standing charges have remained flat, typical standing charges on electricity have more than doubled since 2021 from £86 to £186 per year.

This is primarily due to Ofgem’s reforms to network charges, which have seen volumetric charges replaced with fixed fees to prevent households with solar panels and batteries from avoiding paying their “fair share” of network costs. Although the resulting increase in standing charges has been “noticeable,” Belsham-Harris said the accompanying reduction in unit rates has been obscured by rising wholesale costs.

In response to growing pressure, Ofgem explored the impact of shifting 50% of current standing charges into unit rates. Belsham-Harris said the regulator found that gains by benefitting households would be “relatively small” and would also see some low income households “losing out significantly”.

In the case of electricity standing charges, 15.7 million households would benefit, saving £15 on average per year. The beneficiaries would include 5.5 million low-income households, which would see their annual bill fall by £22 on average.

However, 1.2 million low-income households would see their annual energy bill rise by an average by £45.

A reduction in gas standing charges would be more beneficial for low-income households. The 1.8 million that would be worse off would see their annual bill rise by just £1, whilst the 3.7 million that would benefit would save £13 on average.

Belsham-Harris said the groups losing out would include people with higher energy usage due to medical equipment or a greater need to stay warm, as well as customers with electricity storage heaters, which would be “particularly hard hit and already pay a larger proportion of policy costs, as these fall more heavily on electricity than gas”. The costs of running heat pumps would also increase, making it harder to reach installation targets.

The beneficiaries would include people with second homes and households with solar panels and batteries. With regards to the latter group, Belsham-Harris said a reduction in standing charges would “undermine the aim of Ofgem’s network charging reforms and be a further giveaway for a group that are already able to avoid policy costs which are recovered through unit rates”.

He acknowledged that higher standing charges can be problematic for prepayment customers, who build up debts when they can’t afford to top up. But he said higher unit rates would also exacerbate the seasonal disparity that makes it harder for them to afford energy during the winter.

Belsham-Harris said Ofgem “lacks the tools to easily mitigate the unintended consequences” from reducing standing charges: “Doing so would require identifying consumers based on their characteristics, income or energy usage and taking steps to tackle those who have unfairly benefitted or lost out. However, suppliers don’t hold the right information on energy use and we know many low income and vulnerable consumers already struggle to access support, so it’s likely that many would miss out.

“Meanwhile affluent households would have no incentive to come forward if they face higher costs as a result. It would also add disproportionate administrative costs given the relatively small financial benefits of standing charge reform.”

An alternative option would be to reduce standing charges for certain groups of customers, for example, those on prepayment meters. But this too would have unintended consequences, making prepayment the cheapest payment method for all low energy users, including those that are more affluent.

Responding to proponents of a reduction in standing charges, who have argued that consumers could lower their usage to avoid higher unit rates, Belsham-Harris said this would not get rid of the fixed costs the charges are used to recover. Instead, these costs would be “recycled in even higher unit rates”.

If network charges remained the same, suppliers with a higher proportion of low energy use customers may be unable to recover their costs. This would create an incentive to avoid serving these customers. A new cross-subsidy payment between suppliers would be required to counteract this incentive.

“High energy costs are dragging millions of families down, and more needs to be done to help them — but short term tinkering with standing charges risks being a distraction to these very real problems,” Belsham-Harris concluded.

“It risks increasing costs for some on low incomes at the worst possible time, could hand unfair windfalls to some affluent households, and doesn’t work for the low carbon energy system we need in the future.”

He said improved energy efficiency and additional targeted support for fuel poor households would be “much better” ways of addressing the overarching issue of affordability.