Energy regulator Ofgem today announced that it will be a requirement for energy suppliers to offer a low standing charge tariff by the start of next year. Whilst this sounds at first like good news, the regulator also warned that this is unlikely to actually reduce anyone’s energy bills.
Which leads us to ask – what was the bloody point?
What is a standing charge tariff?
A standing charge is a fee that an energy company can charge you every day on tariffs. They can apply it regardless of whether you actually use any energy at all. It goes towards things like the cost of transporting energy to your home, and business costs for the company itself.
As things currently stand, the standing charge is also included in the energy price cap. This is the maximum amount a company can charge you for a given amount energy if you’re on a standard variable tariff. Right now, that’s £1,755 a year for the average household that pays for their gas and electricity by direct debit.
Because the standing charge doesn’t depend on your actual usage, it makes up a far higher percentage of the overall bill for people who don’t consume much energy. That, in turn, disincentives people from lowering their usage. It also penalizes people who only use energy seasonally, such as using a gas heater during the Winter.
So why will I still pay more?
Ofgem claims that the distribution charges rolled up in the standing charge simply have to be covered one way or another. So, to make up for the new lower standing charge rate option, they’re proposing that the new tariff will come with higher rates per unit of energy.
This means that you’ll now be able to choose between two options:
Paying a low standing amount every day, but more whenever you actually use any power, ORA higher standing amount every day, but slightly less for the power you actually use.
Either way, your bills will be roughly the same. Unless, that is, you pick the wrong tariff, in which case they could be significantly higher.
Don’t you just love the freedom of choice that privatised energy supply brings?
Oh, and by the way, the overall price cap is going up by 2% in October. The standing charge is also going up as part of that, with a 4% increase for electricity and a 14% increase for gas.
Somehow it gets more ridiculous
Martin Lewis, founder of Money Saving Expert, originally campaigned to Ofgem for the lower standing rate tariff. However, the financial virtuoso came out guns blazing against the new announcement. He pointed out that:
While a low or no Standing Charge tariff option is an improvement, and will benefit some users, the core problem is it doesn’t look like it’ll be under the Price Cap mechanism. That leads to two big possible problems:
There is no limit to what firms can charge, so they could wipe the Standing Charge, but increase the unit rate far above what is needed to compensate for it.
Those most in need of this option – vulnerable low users – tend not to switch tariffs. 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.
Add to that the fact it is proposing a minimum usage level to try and cut out second home owners, which could wrongly capture many very low users and overall I worry Ofgem has picked an easy route to appease suppliers’ concerns, that doesn’t help the most vulnerable.
‘Vulnerable low users’ there means groups like pensioners, who have a higher tendency to stick with what they know. They’re precisely the people that Lewis was trying to help when he recommended a second, lower tariff in the first place. However, it looks like Ofgem may have managed to fumble even this basic social good.
The regulator is set to publish a more detailed consultation later today. It should answer some of the more pressing questions about the new choice in standard rates. For now, though, it seems that consumers are faced with a purely illusory choice in how exactly they want to pay the same old bills.
Featured image via the Canary
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