Ofgem recently published a call for input on ‘standing charges’ – the daily charges you currently pay your supplier to cover fixed costs, no matter how much gas or electricity you use – looking at how they are applied to energy bills and what alternatives could be considered. We welcomed the regulator’s decision to open up the conversation and noted that, while standing charges reform wouldn’t address energy affordability challenges as a whole, it is still a welcome and worthwhile consideration which – if executed appropriately – could bring about notable positive changes for some financially vulnerable consumers.
Energy standing charges have risen by over 65% on average since April 2019 and currently sit at around £300 a year for an average household. This is a substantial increase which has recently drawn consternation from many consumers in the context of wider cost of living pressures.
This growth is especially troubling for those on low incomes and prepayment meters (PPMs), as well as those with low energy usage – and there is notable overlap between these groups. People in this position will often be trying to reduce energy usage wherever possible, but are still left unable to avoid these fixed daily costs. Importantly:
- In the first half of 2023, 43% of StepChange debt advice clients had energy arrears and 33% had a negative budget, meaning after going through a full debt advice and budgeting session, their monthly income is not enough to cover their basic monthly costs
- A quarter (24%) of StepChange clients had a PPM in the first half of 2023. High standing charges are especially concerning for this group of customers, because standing charges accrue even when no energy is being used and these costs must be cleared before a PPM customer can access energy again – a situation which worryingly impacts the likelihood of self-rationing among PPM customers
Given the number of people, including many StepChange clients, who are struggling to manage energy costs and likely to be negatively impacted by high standing charges, we encouraged Ofgem to actively explore options for standing charges reform which would improve the experiences of these groups while protecting vulnerable customers with high energy needs – for example, those who are dependent on medical equipment or a warm home.
We especially noted proposals to make standing charges work better for PPM customers. Options put forward for consideration include:
- Reallocating some of the standing charges to the unit rate for PPM households only
- The introduction of standing charge freezes in certain well-defined situations (for example, being used to reduce the build-up of debt during self-disconnections); and
- Moving standing charge accrual ‘to the back’ of PPM meters (which would enable users to pay accrued standing charge costs in a reasonable way over time but not prevent them from accessing energy supply in the interim, minimising the risk of self-disconnection)
Reform targeted towards PPM customers would have to come with extremely tight monitoring and enforcement around poor supplier practice and inappropriate installations, so vulnerable customers with high energy usage do not slip through the cracks and end up on this meter type.
If implemented and monitored effectively, safeguards around PPMs could arguably minimise negative distributional impacts while supporting a group of customers which is currently disadvantaged, but further research is needed to assess how this would translate in reality. We would welcome steps by Ofgem to explore the viability of a range of options for standing charges reform, and to assess their overall impact on different groups.
Any action taken should be designed to improve outcomes for low-income households disadvantaged by the current standing charges set-up, while protecting vulnerable high energy users.
We also remain strongly of the view that holistic reform of the energy funding model is needed to deliver long-term affordability to those at risk of fuel poverty and to provide sufficient protection and assistance to those struggling with energy debts. This includes the implementation of an energy social tariff which protects vulnerable consumers, including those on the lowest incomes.