Standing charges paid to networks by energy suppliers should be replaced with a unit rate charge to help consumers, the boss of Utilita has suggested.
Bill Bullen was speaking to Utility Week after Ofgem recently published a call for input on how the standing charge is applied to energy bills and what alternatives could be considered.
The call for input stresses the fact that suppliers are not obliged to pass fixed costs on to customers through a standing charge, and that there is a lack of variety of tariffs in the market, something which Bullen believes is down to how Ofgem sets the price cap.
Ofgem said: “We do not consider that there is any regulatory barrier to suppliers producing tariff products that incorporate network costs into unit rates. Suppliers are not obligated to pass fixed costs on to customers through a standing charge, but only a tiny minority of suppliers do offer a zero standing -charge tariff.
“Some suppliers have indicated that they would like to see an end to the price cap; there is nothing stopping them from producing a product with a zero standing charge and offering it to their customers, but we note they would need to ensure they are recovering the costs of serving each customer.
“However, in practical terms there is very little variety in the tariffs that suppliers offer in the domestic market. We would like suppliers to make a more varied offer to their customers, and we want to understand what is stopping them from doing so.”
Since being launched in 2003, Utilita has never applied a standing charge to its customers. Speaking in response to Ofgem’s views on tariff variety, Bullen said the regulator is “the architect of this problem, there is no doubt about it”.
“Price capping is what’s driving pricing in the energy sector at the moment and with the margins set where they are people are just going to price at the price cap. To do anything else is to lose money,” Bullen explained.
Bullen was further asked what the solution to high standing charges would be and in response suggested that networks should change the way they charge suppliers from standing to unit rate-based charging.
He said if network companies did not charge suppliers a fixed charge, they would not have to pass those costs on to consumers.
He added: “I suspect the network companies won’t like that because they’ll have cold winters and warmer winters and their revenue won’t quite match their costs because their costs are largely fixed.
“Given that they are the ones with the lowest cost of capital, if there is a funding issue to do with swings and roundabouts on consumption levels then network companies are in the best position to absorb that because they have the lowest cost of capital so economically there’s a strong argument for saying network companies should only charge us a unit rate if you want to avoid standing charges to consumers.
“Don’t leave it with the supply businesses because we’re very high risk, very high cost of capital businesses relative to monopoly distribution companies.”
Responding to Bullen’s comments, a spokesperson for the Energy Networks Association, which represents the UK’s energy network operators, said: “Standing charges are set by the energy supplier, of which network costs are only one element.
“Network costs cover the use of the gas and electricity networks and are regulated by Ofgem – network operators must charge them in accordance with the methodology submitted to Ofgem.
“Any changes to how costs are recovered will need careful consideration, both with respect to the levels of investment required as the nation decarbonises and to how fair the system is across the entire customer base.”
Responding to the call for input Energy UK’s deputy director Daniel Portis said: “Although some suppliers have reduced standing charges to help customers where they can, the price cap on the unit rate leaves suppliers very little scope to offer tariffs with low standing charges.
“Ofgem therefore needs to examine this in detail and introduce any eventual changes with care to ensure that customers in the most difficult situations are still protected.”
He agreed that there is a limited variety in the tariffs that suppliers are offering customers and that this largely comes down to the fact that a majority of customers are currently on price capped tariffs.
Portis added: “The price cap reflects what Ofgem considers to be the efficient costs of supplying energy to customers and acts as a cap on both the unit rate and standing charge.
“Suppliers who wanted to offer a lower standing charge, would need to set a higher corresponding unit rate to ensure they recouped costs. Even if this were commercially viable, the price cap prevents suppliers from doing this.”
Standing charges are the fixed component of customers’ energy bills. They help industry recover the fixed operational costs of serving each customer, and fund network costs.
Since 2021, these charges have more than doubled from £86 per annum to £186 per annum on average for direct debit-paying electricity customers due to a number of factors including the fact that Ofgem moved charging of certain types of network costs from a unit cost basis to a fixed basis as part of its Targeted Charging Review (TCR) and also the costs of recent supplier failures.
“Suppliers have passed these costs on to their customers through standing charges rather than unit rates. It is important to note that these charges would need to be met somehow and would be borne by customers through unit rates if not through standing charges. However, we recognise that standing charges are a particular burden for some consumers,” Ofgem’s call for input stated.
Costs in gas in relation to networks and the Supplier of Last Resort (SoLR) mechanism are passed to customers through unit rates. The regulator said it has not seen the “same urgent need for change” in the gas sector that prompted the TCR and that as a result, gas standing charges have remained broadly static in real terms.
Also commenting on Ofgem’s call for input was Octopus Energy boss Greg Jackson, who said: “Standing charges have become way too high and we need regulatory change so we can slash them. They disproportionately affect people on low incomes and make it hard to save money by reducing energy use.
“It’s not right that a meter can rack up hundreds of pounds a year even when the customer is hardly using any energy. Indeed, people on prepay sometimes have to top up when they’ve used nothing.
“Until we get regulatory change, Octopus will still continue to do what we can to keep standing charges as low as possible for all customers.”