What are standing charges and why are they increasing?
In recent blogs, we explained how a volatile and turbulent wholesale energy market is driving high costs for UK consumers.
Alongside this, the ‘non-energy’ element of an energy bill, the standing charges, have also increased this year. Here we explain why.
What is a standing charge?
The standing charge is a fixed amount that you pay on your energy bill every day, regardless of your usage.
The charge covers those ‘non-energy’ costs that suppliers have to pay on behalf of customers. These include but are not limited to: the costs of using and maintenance of the energy networks (the infrastructure that gets electricity and gas to your home), costs of government support schemes and the costs of carrying out meter readings.
Standing charges are applied to both electricity and gas tariffs. They can also vary slightly by the region of the country you live in.
The energy regulator Ofgem’s rationale for why these costs should be included in the standing charges is to distribute the amounts evenly across everyone. If they were added to the kWh usage costs, it could lead to vulnerable households with high energy costs paying proportionally larger sums.
So, why are standing charges increasing?
Here are the main factors that are driving the increases.
Costs of the failed suppliers
The largest driver in the recent standing charge increase has come from the costs of the 29 suppliers who have exited the market in recent months (excluding Bulb).
As we explained in a previous blog, the total costs (roughly £2bn) are shared across all remaining suppliers in the market through ‘Last Resort Supplier Payments’. These are added to the electricity standing charges as the costs are ultimately recovered on a flat rate basis per customer. For gas, they are being recovered via a volumetric charge, meaning the costs are added to unit rates.
Good Energy campaigned hard for these costs to be spread over a longer timeframe. However, Ofgem decided differently and accelerated the claims process instead, which means the cost recovery began from April this year over a 12-month period, with further rises also likely.
Warm Home Discount Scheme
The Warm Home Discount Scheme started in 2011 and is the primary government initiative to provide relief to vulnerable households for their energy bills. Like other energy related social and environmental policy schemes, the Warm Home Discount is paid for through energy bills, rather than general taxation.
And to ensure the schemes are paid for evenly amongst consumers, the costs are added to standing charges on energy bills.
The additional increases came earlier this year when the government announced an expansion of the scheme spending to a total of £475m.
Good Energy, and a few other suppliers, have been enrolled in the scheme for the first time this year, as the government recently lowered the threshold for suppliers that need to participate. This means this is a new additional cost for Good Energy customers from 1st April this year.
Network charging reforms
The way we all pay for using the network has been under reform by the energy regulator for a number of years now.
From April this year, the first of many decisions came into effect – moving distribution network residual charges to a fixed cost (which is added to standing charges).
In simple terms, this means where previously a portion of the network costs (the costs for using and maintenance of the network infrastructure) were included in your unit rates, Ofgem has decided this should move to a fixed charge and collected via increased standing charges.
Again, Ofgem’s rationale for this change relates to fairness – so we all contribute to network costs in a way deemed proportionate by Ofgem’s new fixed charging bands. Finally, on top of this, network costs have been increasing because of the need to upgrade and expand our energy infrastructure. This has recently been compounded by inflationary pressures with rising costs for materials and wages.
