Competition and Markets Authority Archives

Forced installations of prepayment meters have been widely condemned but the fact that prepayment customers pay significantly more than other energy consumers has attracted far less attention.

Prepay customers pay more simply because their standing charges are so high, now £350 p.a. for gas and electricity combined, which is £50 p.a. more than those who pay by direct debit.

Most prepayment customers are on low incomes so spend less on energy. Their higher standing charges further reduce the amount of energy they can afford, with many self-disconnecting from their energy supply.

The government has announced that it will spend £200 million of tax-payers’ money to take the edge off this for nine months from July but the higher standing charges are the explicit result of a series of policy decisions by the energy regulator Ofgem. Ofgem has consistently favoured the energy companies over the most vulnerable consumers.

Standing charges should be much lower for all consumers, and particularly prepayment customers, because they substantially exceed the costs that should be recovered through them, as Ofgem’s own analysis shows.

High standing charges contributed to the energy crisis by encouraging the entry of firms that were more intent on capturing these payments than on managing their energy costs effectively.

Ofgem’s policy of reducing the unit rate rather than the standing charge has also increased overall demand for energy, exacerbating carbon emissions and reducing the U.K.’s energy security.

Download the report commissioned from Ideal Economics by National Energy Action:

Reforming energy standing charges for prepayment customers Download

The new energy price cap came into effect on 1 April and this was accompanied by some media attention about the shockingly high level of the standing charge in it. The news coverage was sparked by an open letter from Fuel Poverty Action which drew on work by David Osmon, a former senior economist at Ofgem, at Ideal Economics. The letter can be read at: https://docs.google.com/document/d/1R6zGe4K2PTUCnAO6Z6w8lY-4eiJV0YKjg7PsUHbnQJI/edit

The main points are:-

In the new price cap the fixed (‘standing’) charge is around £300 p.a.. For the poorest 10% of households this amounts to a third of their total energy spending.
Ofgem’s policy of raising the standing charge instead of the price per unit of energy is perverse. The higher standing charge disproportionately affects poor households (who use least energy) while the lower unit rate increases total energy consumption, thereby raising carbon emissions and reducing energy security.
The standing charge should be about £60 p.a. according to Ofgem’s own analysis of the costs incurred by suppliers.

The standing charge is already set to rise further absent a change in policy. Not only is Ofgem planning to load further costs onto it but any increases in it will be cumulative: they will cause more households to be in fuel poverty and thereby eligible for the Warm Home Discount, the costs of which are passed back to consumers in… the standing charge! This approach is unsustainable.

Ofgem should instead reduce the standing charge by £200 p.a., which would directly help the lowest paid to heat their homes without the government having to spend any money to achieve this.

In addition, the government should remove VAT on (just) the standing charge and if Ofgem lowered the standing charge the cost to the government of doing this would be greatly reduced.

Some further points relating to the standing charge:-

High standing charges contributed to the energy crisis because some suppliers entered the market more focused on acquiring customers in order to obtain these payments than on managing their energy costs.
The price cap was introduced because many consumers were unable to identify good value tariffs, which was made more difficult by tariffs having standing charges as well as unit rates. Ofgem had previously planned to fix the level of the standing charge to simplify tariffs but gave in to pressure from suppliers not to do this.
Replacing the current price cap with a much simpler cap on just the standing charge would not only protect vulnerable consumers, reduce emissions and improve energy security but also boost competition because consumers would only need to consider unit rates to find the cheapest option. This would lower prices generally.

There is more on these points in the attached article by David Osmon:-

The high level of the standing charge in energy bills Download