Amid the furore surrounding the increase in the energy price cap it has gone unnoticed that the fixed element of energy bills (the standing charge) has increased by £75. From April households will typically have to pay £265 p.a. but in some cases as much as £328 p.a. before they can consume any energy.
Low income households are worst affected by this because they spend less on energy so the standing charge forms a larger proportion of their bills. The poorest ten per cent spend £931 on gas and electricity every year and the standing charge will now take up around 30% of that. Those who will pay the highest standing charge (people in the south west who don’t pay by direct debit) will be left with just £603 worth of energy.
Ofgem has been loading up the standing charge since it introduced the price cap, when for some reason it lowered the price per unit of energy but not the standing charge. Not only did this confer the biggest savings on the high income consumers who use most energy but it also increased overall energy consumption, leading to higher carbon emissions and reduced security of supply.
Standing charges greatly exceed the costs suppliers incur in taking on customers and by perpetuating this Ofgem’s price cap contributed to the energy crisis. Energy firms’ incentive to acquire customers in order to gain their standing charge payments may have taken precedence over managing their energy costs effectively. Many failed suppliers amassed customers very quickly by offering deals that didn’t cover the costs of supplying them with energy and hadn’t bought enough energy in advance.
Almost all of the latest increase in the standing charge is to reimburse suppliers for taking on the customers of failed companies. It’s unfortunate to say the least that the low income households who most needed protection by the energy price cap are now picking up the tab for its poor design.
In stark contrast to Ofgem’s approach, capping only the standing charge is likely to be the only way to make the market work well. This would ensure the poorest consumers save most and it would reduce overall consumption of energy, thereby reducing emissions and improving security of supply. It would also boost competition as consumers would only need to consider unit rates to find the cheapest option and suppliers would have no incentive other than to provide sustainable energy deals.
“It is perverse that Ofgem has chosen to rack up the part of energy bills that hits the poorest households hardest and in doing so has increased carbon emissions and reduced security of supply. This is the very opposite of what people expect them to be doing”, says the author of a report on this published by the Ideal Economics think tank, David Osmon.
“No-one, least of all people on low incomes, should have to pay £328 before they get to access a supply of energy, especially as the costs suppliers incur in providing this are so much less than that.”
Download the report here: