Energy firms to offer zero standing charge tariffs under Ofgem plans

Energy firms will have to offer household tariffs free of standing charges as an alternative to existing ones under plans by regulator Ofgem.

The regulator wants suppliers to have to offer “zero standing charge” tariffs alongside other tariffs by next winter as part of plans to address ballooning household energy debt.

It is also proposing new standards for suppliers to make it easier for customers who are struggling to pay their bills to get support.

Under Ofgem’s price cap, standing charges have risen by 43% since 2019, and from January will cost dual fuel households an average of £338 a year, although they disproportionately affect those who use less energy as the fixed costs make up a higher proportion of their overall bill.

Since October 1, households on a standard variable tariff that pay for their electricity by direct debit have paid on average 24.5p per unit, with a standing charge of 60.99p per day. For gas, the average has been 6.24p per unit with a standing charge of 31.66p per day.

From January 1, average standing charges will decrease slightly to 60.97p per day for electricity and 31.65p per day for gas.

Standing charges pay for the fixed costs to suppliers of providing energy to homes.

Some suppliers already offer low or no standing charge tariffs, which are at least 10% below the price cap, but they are not universal.

However, while these tariffs come with a lower standing charge, they do have a higher unit rate, and are therefore more likely to benefit customers who use less energy.

Ofgem said tens of thousands of consumers responded to its call for input on standing charges, with many asking for them to be removed altogether, saying that this would make it easier for them to manage their bills or pay back debt.

However, those who were high users of energy, often for medical and health reasons, would see their bills rise significantly, meaning it was important for households to retain a choice of tariff.

Ofgem also set out plans for a “debt guarantee” to improve the standard of service offered by suppliers supporting customers in debt, which it said would give households “consistent, compassionate and tailored support”.

Suppliers could also be required to accept debt repayment offers from reputable third parties such as debt advice agencies or consumer organisations.

It also warned that the level of debt built up during the energy crisis had become “unsustainable”, saying it required a “bespoke, one-off solution to tackle it that will drive down the costs of debt in the long term for the benefit of all consumers”.

Energy debt and arrears have continued to grow, reaching £3.82 billion in September – a 91% or £1.82 billion increase in two years.

Tim Jarvis, director general of markets at Ofgem, said: “We know that many households continue to struggle with bills after the events of the energy crisis, which is why earlier this year, we took steps to consider all the issues around affordability and debt – including the impact of the standing charge.

“Today we’re setting out the next steps in what Ofgem can do to meet these challenges, as part of our work to make sure the energy market is working in consumers’ interests.

“Many people feel very strongly that standing charges are unfair and prevent them from being able to manage their bills effectively.

“We want to give consumers the ability to make the choice that’s right for them without putting any one group of consumers at a disadvantage. And by having a zero standing charge tariff, we would create that choice for everyone.”

Advice service National Debtline said energy debt is the second-most common debt among people it helps – behind credit cards – with the average amount owed in energy arrears increasing by 37% in the past year to £1,541.

National Energy Action said Ofgem’s “lack of any significant reform” of standing charges was “extremely disappointing”.

The charity’s director of policy and advocacy, Peter Smith, said: “There is significant public concern around how high standing charges are. All major political parties made promises in their manifestos to reduce standing charges.

“Households that use prepayment meters are particularly impacted by the continuation of high standing charges. While several options to better protect prepayment meter households have been identified, Ofgem has opted to do nothing, leaving vulnerable households in often dire situations.”

Citizens Advice head of energy policy Alex Belsham-Harris said: “We hear from people who’ve turned off their heating, ration their hot water, and avoid charging essential mobility devices, yet still feel like they’re fighting a losing battle with their energy bills.

“It’s vital that changes to standing charges avoid driving up bills for low-income households who have higher energy needs.”

Martin Lewis, founder of MoneySavingExpert.com, said the best option would be to slash standing charges within the price cap but this would require Government support for vulnerable high energy users.

He said: “Standing charges are a £338-a-year poll tax on energy bills, a moral hazard disincentivising lower users from cutting their bills.

“They also punish customers that only use gas for central heating in winter, many of whom are elderly, by making them pay for every day in summer. It’s by far the biggest single subject of complaint I get from the public about energy bills.

“The problem with presenting a choice of price caps is many vulnerable people won’t make that choice. So I will be making representation to Ofgem to ensure firms are mandated to default lower-use price cap customers on to the no standing charge tariff – or at least do that for those on the Priority Services Register.”

Richard Neudegg, director of regulation at Uswitch.com, said: “The promise of more zero or low standing charge tariffs options by next winter could help bring more choice to the market, and might be a good choice for some lower consumption households.

“But consumers must beware that the trade-off for lower standing charges will be higher unit rates, so comparing options will be important.”

Published: 12/12/2024 by Radio NewsHub