Costs incurred as a result of the Supplier of Last Resort (SoLR) process should be recovered through general taxation, Citizens Advice has argued.
The consumer charity was writing in response to an Ofgem consultation on whether SoLR levy costs should remain being recovered through domestic customers’ daily electricity standing charges or should instead be recovered via a usage-based (volumetric) approach.
Following a string of retailer failures last year, Ofgem said SoLR levy costs are currently at “unprecedented” levels. The regulator approved more than £1.8 billion in Last Resort Supply Payment (LRSP) claims to be recovered by the SoLRs, £1 billion of which is set to be recovered from electricity customers.
In an open letter Ofgem’s director of retail, Neil Lawrence, said the regulator would review how these costs are recovered following concerns from consumers and consumer groups on recent increases in standing charge levels allowed under the default tariff cap.
Under the current rules there is no link between electricity consumption and contribution to SoLR costs, meaning all electricity consumers pay the same contribution.
However, market conditions were much more benign when this rule was approved in 2019. Ofgem said the current level of SoLR costs equates to just over £34 per domestic consumer in the year April-March 22/23, versus typical levels of pence per year previously.
“We have noted feedback from consumers and consumer groups that the existing arrangements are perceived by some to be unfair, with a ‘volumetric’ or consumption basis seen as more fair,” said Lawrence.
“In particular, we understand that the use of fixed charges to recover SoLR costs can contribute to higher standing charges, and to users seeing energy costs, and sometimes debts, building up, despite their actions to reduce consumption. We recognise in these current times this adds to anxieties over energy affordability,” he added.
Ofgem believes any changes, if required, should be implemented in time for the next price cap period beginning October 2022.
A response letter written by Citizens Advice’s principal economic regulation specialist Andy Manning said the potential impact on energy bills for winter is “relatively limited”, as the consultation is only relevant to costs that are being recovered through electricity charges.
This, he said, equates to a reduction in fixed charges of around £17 per household in total as it would only apply for six months, offset by the increase in volumetric charges.
Manning added: “Whilst we agree that the level of SoLR costs themselves are extraordinary, we are concerned that Ofgem and industry resource and attention could be taken away from initiatives that deliver more significant and lasting benefits for consumers.
“Recovering SoLR costs involves difficult trade-offs with judgement over whether fixed or volumetric charges are fairer. We believe that the fairest, and more progressive, way to recover SoLR costs is through general taxation.
“We recognise that this is not within the scope of this consultation, but believe future costs relating to supplier failure, such as arising from Special Administration, should be recovered in this way.”
Manning outlined concerns about linking SoLR costs with usage, pointing to the fact some vulnerable customers may use more energy than more affluent consumers. He further explained that while the charity’s research does show some linkage between usage and vulnerability, this is not particularly strong. Any interventions, he added, must be properly targeted.
He continued: “Adjusting fixed charges reduces costs for all lower consuming customers whilst increasing costs for all higher consuming consumers, for example including those with health needs requiring electricity.
“The use of volumetric charging could disproportionately impact customers with protected characteristics. For example, disabled consumers may require high levels of energy use to keep their homes at a certain temperature, or to charge electric equipment such as wheelchairs.
“Disabled consumers already face higher living costs than non-disabled consumers. Mitigations should be put in place (e.g. increasing the value of WHD) if this is carried forward.”
The Business, Energy and Industrial Strategy Committee has also called for changes to the way SoLR costs are recovered as one of a number of recommendations in its report on its inquiry into the energy retail market.
The report, which was released on Tuesday (26 July), described the addition of SoLR to costs to “regressive standing charges” as “wrong” but added that “even if these costs are recouped on a usage basis, fuel poor, low income, and vulnerable customers with high energy demand, will still be hit hard.”
It said recouping SoLR costs from general taxation would be one solution to the issue.