Consumer groups question benefits of lower standing charge tariff proposals

Ofgem has defended its proposal to make energy suppliers offer tariffs with lower standing charges as both the industry and consumer groups questioned the likely benefits for households.

Energy suppliers will be made to offer at least one tariff with lower standing charges as soon as January under plans confirmed by the industry regulator, but it ditched proposals to remove the fixed costs entirely for some deals.

Standing charges are applied daily, regardless of how much energy the customer uses, and are used to cover the cost of supplying energy to homes and businesses and building new network infrastructure.

Campaigners say they are unfair because everybody pays the same rate, meaning they make up a far higher proportion of bills for people using less energy.

Ofgem said it wants to give consumers more choice on how they pay standing charges, with the plans set to allow households to pay the costs as part of their unit rate by lowering the daily fixed amount.

In a briefing on Wednesday, Ofgem acknowledged that the proposals would not lower bills but said they were designed for those who preferred a more “pay as you go” approach to energy costs that was not currently available.

However Citizens Advice raised concerns that not only would the plans not bring down people’s bills, they could even leave some consumers paying more.

Gillian Cooper, director of energy at Citizens Advice, said: “Plans to offer a lower standing charge – the fixed cost of being connected to the electricity supply – may provide more choice to consumers, but won’t bring down people’s bills.

“There’s a real risk that those with higher energy needs, like some older or disabled people, could end up paying more if they choose one of these tariffs, so it’s crucial people are supported to make the right choice when this option becomes more widely available from January.

“With October’s price hike just around the corner, lower standing charge tariffs will not help the millions of households bracing themselves for yet another winter of unaffordable energy bills. The Government must urgently set out plans for how it will support households struggling the most with energy costs now and over the coming years.”

Martin Lewis, the founder of MoneySavingExpert.com, described the proposals as “disappointing”.

He said: “While the Price Cap has unfortunately become a default price for many, the reason it was set up was as a backstop tariff for those who don’t or can’t engage in the market. Mandating a low Standing Charge switchers tariff outside the Cap won’t help them.

“I worry Ofgem has picked an easy route to appease suppliers’ concerns, that doesn’t help the most vulnerable. I suspect if it goes ahead like this, not enough people will switch and they’ll say ‘it wasn’t worth it’. We will robustly be pushing back in response in the consultation.”

Dhara Vyas, chief executive of Energy UK, which represents firms, warned that standing charges covered essential costs that needed to be recovered “one way or the other”.

He said: “We know households have been facing high energy costs for too long now and that recovering all the different costs on the energy bill in a way that is fair to all customers is a difficult balance – which is exactly what Ofgem’s cost allocation review is examining.

“It’s hard to see how pre-empting this with a measure which Ofgem admits will only be temporary and merely move costs around on the bill – so delivering a limited benefit to customers – warrants the potential cost and disruption.”

Ofgem stressed these charges cannot be removed entirely and that they can only be moved from one part of the bill to another, which means they are unlikely to mean lower energy costs.

It said it dropped earlier plans for tariffs with zero standing charges and much higher unit rates, as this could have unfairly impacted consumers with high energy needs, such as those who rely on power for medical reasons.

It is also looking to introduce a minimum usage on to the new tariffs so that those with second homes or properties left vacant for long periods do not disproportionately benefit.

Ofgem is now launching one final consultation on the plans, with aims to make a decision by the end of the year, paving the way for the new tariffs to be available to everyone across Britain by the end of January.

Tim Jarvis, director general of markets at Ofgem, said: “We’ve listened to thousands of consumers that wanted to see changes to the standing charge and taken action.

“We have carefully considered how we can offer more choice on how they pay these fixed costs, however we have taken care to ensure we don’t make some customers worse off.

“After examining all the options available to us, we believe that the right way forward is to require all major suppliers to offer at least one tariff with a lower standing charge.

“This will deliver the choice we know customers want, without having a detrimental impact on customers that have high energy needs.”

But he added: “We cannot remove these charges, we can only move costs around.

“These changes would give households the choice they have asked for, but it’s important that everyone carefully considers what’s right for them as these tariffs are unlikely to reduce bills on their own.”

It comes ahead of a 2% rise in energy costs when the next price cap change takes effect on October 1, which will see the bill for a typical household rise from £1,720 to £1,755 a year.

Martin McCluskey, minister for energy consumers, said: “Consumers should have freedom and choice when choosing an energy tariff that works for them.

“This proposal will make more tariffs available on the market, giving people more options to pay lower standing charges if that suits their needs.”

Ofgem said the new lower standing charge tariff mandate would be likely to only be a short-term measure while it moots permanent changes to allocate costs within the system, as the UK shifts towards renewable energy.