Tag: vulnerable consumer

The high level of the standing charge in energy bills

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 billsDownload

The extortionate level of the standing charge in the energy price cap

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:

The high level of standing charges in the energy price capDownload