What’s going on with standing charges?
Standing charges are a fixed daily fee that all consumers pay for the supply of electricity and gas, regardless of how much they use. They are one of two key components of energy bills alongside unit pricing, where consumers are charged for every unit of electricity they consume. In principle, standing charges are intended to cover the fixed costs of electricity supply - these include maintaining transmission and distribution networks, upgrading the grid and payments to government social and environmental schemes.
This way of charging customers has been in place practically as long as electricity supply itself. However, the cost of the standing charge component has been on the rise over the past three years for a number of reasons, including covering the cost of multiple large suppliers going out of business, and inflation. As a result, standing charges have come under increasing scrutiny. Social campaigners such as Martin Lewis have pushed for reforms to keep costs down for the most vulnerable, whilst Ofgem has begun a public consultation into what changes could be made. Such calls for reform are unlikely to go away anytime soon: the energy transition will require greater spending on fixed costs such as grid upgrades, meaning there will be continuing upward pressure on standing charge costs under the present system.
What’s the problem with standing charges?
Standing charges disproportionately impact lower income households. Even if these households reduce their consumption significantly, they still incur significant daily costs through the standing charge. Therefore, the 9% of the UK who are behind on their bills are forced to take ever more drastic cuts to their consumption to try and reduce their electricity bills to a level they can cope with (1).
The present standing charge structure doesn’t incentivise households to use electricity more efficiently. Despite the fact that households who use electricity at off-peak hours actually alleviate pressure on the grid, they’re billed the same as those who use electricity during the congested peak period. For the same reason that lower income households find it hard to save money, households across the UK therefore have less of an incentive to cut their electricity usage.
Figure 1. Standing charge variation in Great Britain, with prices for South Wales, North Eastern England and London (Source: Ofgem)
Standing charges vary significantly by region. While the average GB standing charge is currently 60.99p, customers in London spend as little as 40p daily, whilst Scotland, Northern England and Wales pay more like 65-70p (2). Although this reflects the increased costs of servicing electricity supply in sparsely inhabited regions, the necessity of having electricity supply means many consider these regional differences to be punitive and unfair.
What does the future hold for standing charges?
Clearly, standing charges are unpopular - two-thirds of respondents to a recent Ofgem call for input called for abolishing standing charges entirely. There is a widespread belief that standing charges are fundamentally unfair and a way for energy suppliers to make more money out of consumers. Ultimately, there’s currently no link between the standing charge you pay and the service you receive – to the consumer, electricity supply is electricity supply. It’s easy to understand why so many people are unhappy with how we price electricity.
But while standing charges aren’t popular, you can’t eliminate the real fixed costs which they cover. One solution proposed by Ofgem, and supported by several major UK energy suppliers, is to shift a proportion of fixed costs from the standing charge to the unit rate (3). Analysis suggests this could redistribute costs from low-income households, for whom the saving would be significant, to high-income households whose financial loss would be negligible. This change would also create a greater incentive for high consumption households to use electricity more efficiently, benefitting their wallets and the planet.
However, any reform of this type is unlikely to alleviate regional disparities. Neither will shuffling costs between the two parts of the bill make any impact on reducing the cost of the future electricity system we need to fight climate change. And none of this takes away from the fact customers don’t feel that the money they’re paying is reflected in the service they get. In light of the challenges facing the electricity market and increasing pressures on the grid, it might be time to find entirely new funding models for billing residential electricity consumption altogether, and replace opaque standing charges with new charges directly linked to the quality of the service customers receive.
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