Why standing charges are fairer than you might think

With added scrutiny on bills, rising standing charges have been getting particular attention, and the regulator, Ofgem, is now looking at whether they should be reformed.

Many people feel it is unfair to have to pay these daily charges before actually using any energy, and they make up a larger part of the bill for people who use less energy, who tend also to be on lower incomes. However, there are fixed costs related to our energy supply that need to be paid for, and some good reasons why standing charges are the fairest way to do so.

Reducing standing charges — and raising unit rates instead — would save a relatively small amount for some consumers. At the same time, some vulnerable and low income consumers would face even higher costs than they do today. It would also mean some affluent consumers could use low carbon technologies to avoid paying their fair share, and as the energy system adapts for net zero, this could drive inefficiencies that put up prices for all of us.

It’s understandable that policymakers want to look at how they can support consumers, but Ofgem lacks the tools to clean up the unintended consequences this change could make. Even if it went ahead, it is not a meaningful solution to the affordability crisis we face. Rather than moving money between consumers in a poorly targeted way, we need the Government to step in with additional targeted bill support and supporting more households to access energy efficiency measures.

What are standing charges?

Standing charges are the part of your energy price that remains fixed regardless of how much you use, while the part that changes with usage is called the unit rate. Standing charges also exist for water (if you have a metered supply) and in some broadband and landline products, where the charges are known as line rental.

This form of pricing allows firms to recover their fixed costs of providing you with a service. In energy there are two main costs which have fixed elements:

• The supplier’s operating costs, including billing and metering, which make up the majority of the standing charge in gas, and around a third in electricity
• Charges for the network — the pipes and wires that carry our energy — which for electricity make up around 60% of the standing charge

Much smaller amounts of the fixed costs relate to policy costs and temporary costs arising from supplier failures in 2021/22, which should fall away in the next year.

Energy suppliers are generally free to set standing charges as they like, though their default products have to comply with the energy price cap. However, products with zero standing charge are rare, because they increase the risk that a supplier can’t recover its fixed costs, and suppliers that do offer these products charge much higher unit rates.

Local energy networks have different costs, and supplier costs may also be higher in some areas. As a result, electricity standing charges differ by up to £87 a year depending on location. Some people have called for these costs to be flattened so people pay the same across the country. We think this is a decision for the Government to make — for example, it already intervenes to reduce the cost of the network for consumers in North Scotland through a cross-subsidy paid for by other consumers. This decision should be made alongside its review of wholesale energy markets (REMA), which is considering more local energy pricing that could mean higher network costs are offset by lower local wholesale prices.

Standing charges are increasing to ensure a fairer transition to net zero

Standing charges for electricity have doubled since 2021, from £86 to £186 a year (for a typical household paying by direct debit), while gas standing charges have remained flat. Last winter the government provided financial support which more than offset standing charges, but since this ended in April 2023 the impact of these increases has been felt more.

The key driver of the increase has been a change in electricity network charges. These used to be mostly charged depending on usage, but a growing number of consumers were able to avoid paying their fair share of network costs by generating their own electricity, for example with solar panels, and using on-site storage, like batteries.

As more people are using these technologies, there’s an increasing risk that more fixed costs are picked up by other consumers and leading to inefficiencies in the energy system. Similar problems do not exist in gas, as it is much harder for consumers to use technology to reduce their usage to avoid paying a fair share of fixed costs.

To tackle this, Ofgem decided that over the coming years, network charges (across both domestic and non-domestic customers) should be moved from unit rate to fixed network charges. Ofgem projected that typical households would initially save around £5 a year, while low energy users would see increases of up to £20 a year. It also expected that removing the distortions would deliver consumer benefits of up to £1.6bn by 2040.

However, while the increase in standing charges as a result of these reforms has been noticeable, the simultaneous reduction in unit rates has been more than offset by the impact of rising wholesale costs feeding through to energy prices.

The benefits of reducing standing charges would be small, and there would be some unfair outcomes

In response to growing pressure over standing charges, Ofgem is now looking again at these costs. As part of this work, it analysed the impact of moving 50% of the current standing charges into the unit rate. Overall this would mean lower users would face lower costs, while higher users would pay more.

In electricity, households that gain — including 5.5 million low income electricity consumers — would see small annual savings, but over a million households on low incomes would see larger increases in their electricity costs.

In relation to gas, reducing standing charges has even smaller savings, though low income households lose out to a much smaller extent.

Across both fuels the typical gains for those who benefit are relatively small compared to fluctuations in wholesale prices or reforms like Ofgem’s proposals to reduce the difference in price for different payment methods. Unlike better targeted support options, these gains are being paid for in part by some low income consumers losing out significantly.

Some groups of consumers would also be more likely to lose out based on their energy needs and types of usage, including:

• people who have higher energy usage because of medical equipment or greater need to stay warm
• people with electricity storage heaters — this group are particularly hard hit and already pay a larger proportion of policy costs, as these fall more heavily on electricity than gas
• people who use heat pumps — our net zero targets rely on more people using these in future, and higher costs could make targets for installation harder to reach

Reducing standing charges could also mean more affluent households could avoid paying their fair share of network costs in ways that are clearly unfair. This would include:

• households with solar panels and batteries who can reduce their energy usage significantly — this 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.
• people who have second homes, who would pay a lower share of fixed costs per property than someone with the same overall energy usage who lives in a single property.

Customers who prepay for energy can find standing charges a particular challenge, as they build up debt while they are disconnected from energy, including when they can’t afford to top up. However, reducing standing charges could exacerbate other risks. Higher unit rates would further increase the seasonal disparity in costs for prepay customers, and could make it harder for them to to afford the energy they need in winter.

There are no easy ways to prevent unintended consequences

While Ofgem could reduce standing charges, it lacks the tools to easily mitigate the unintended consequences this would bring about. 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.

A more targeted reform option could be to reduce standing charges for certain groups of consumers only — such as those on prepay. This would make it the cheapest payment method for all low energy users, which may see people seek to move onto it, even if it’s inappropriate for them. It could also require suppliers to prevent prepay being used by more affluent low users seeking to avoid costs. This would be a significant change from the current arrangements around choices of payment method, and could also be challenging for suppliers to administer.

Some supporters of reducing standing charges have suggested that consumers could reduce their energy usage to avoid paying higher unit rates. This would not make the fixed costs disappear — any fixed costs that some people avoid by reducing usage will be recycled in even higher unit rates. It would further increase costs for higher users, including those who can’t reduce their usage such as renters living in energy inefficient homes.

Reforms could also impact competition between suppliers and reduce choice for some consumers. If network charges remain the same but standing charges are reduced, suppliers with greater numbers of lower energy users may not be able to recover their costs. They may then take steps to avoid serving these customers, and new ‘cross-subsidy’ payments between suppliers may be needed to fairly share these costs.

Targeted bill support and energy efficiency are much better ways to help

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. 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.

Citizens Advice will continue our work to keep the fixed costs that underpin the standing charge as low as possible. This includes ensuring networks make fair profits, ensuring supplier operating costs are efficient and reducing the risk of supplier failure in future.

We also believe that the best way energy affordability can be improved in the coming years is through energy efficiency to sustainably reduce energy usage and additional bill support for those at most risk of fuel poverty. This can make use of the tools at government’s disposal to effectively target support and pay for it fairly through the tax system.