What are standing charges and how could changes lower your energy bills?

Financial expert Martin Lewis has said the plan to force energy firms to offer household tariffs free of standing charges “isn’t the best possible outcome”.

Regulator Ofgem 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.

But Lewis said more should be done to reduce the “poll tax on energy bills” – which would require government intervention to slash standing charges within the price cap and provide support for vulnerable high energy users.

He wrote on X: “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.”

What are standing charges?

Standing charges are a fixed daily fee that households pay to energy suppliers, regardless of how much gas or electricity they use.

These charges cover the costs associated with maintaining the energy network infrastructure, such as pipes, wires, and meters, as well as customer service and admin. They are added to the cost of energy consumption and are typically shown separately on energy bills.

Standing charges remain the same each day, regardless of usage, and can be particularly noticeable for households with low energy consumption. In recent years, standing charges have been rising due to the cost of living crisis.

The energy price cap, set by Ofgem, limits the amount suppliers can charge for the energy consumed, ensuring consumers aren’t overcharged. However, standing charges do not fall under the price cap mechanism, meaning that they can still fluctuate.

While the cap provides some protection against excessive prices for electricity and gas, rising standing charges have become a growing concern for consumers, especially when energy bills continue to go up.

Tim Jarvis, director general of markets at Ofgem, told Radio 4’s Today programme that standing charges “are not costs we can make go away” and “need to appear in bills somewhere”.

Why have they become so expensive?

In recent years, standing charges have increased due to the cost of living crisis and higher costs within the industry. Energy debt and arrears have continued to grow, reaching £3.82bn in September – a 91%, or £1.8bn, increase in two years.

The UK’s energy networks – comprising power lines, gas pipelines, and metering systems – require ongoing maintenance and investment to ensure they remain safe and efficient. As these networks age and require more investment to maintain, energy suppliers pass these costs onto consumers through standing charges.

Additionally, regulatory changes, such as stricter environmental standards and the push for greener energy sources, have added to costs.

One other significant factor for the increased costs has been the ongoing war in Ukraine. Russia is a major supplier of natural gas to Europe and the invasion of Ukraine in 2022 severely disrupted global energy markets. The resulting supply shortages, particularly of gas, caused a sharp spike in wholesale energy prices across Europe.

While the energy price cap limits the amount consumers pay for the energy they use, the rise in wholesale prices has had a knock-on effect on the energy system, leading to higher operational costs for energy suppliers.

To manage these increased costs, suppliers have raised standing charges, which have not been capped by the energy price cap.

Inflation and rising costs in other sectors has also added to the financial strain on energy companies, further driving up the cost of standing charges.

What is Ofgem announcing today?

Energy firms will have to offer household tariffs free of standing charges as an alternative to existing ones. Suppliers will 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. Some suppliers already offer low or no standing charge tariffs, which are at least 10% below the price cap, but they are not universal.

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.

Jarvis said that the proposals will be developed with the industry over “the next few months” to see how they will be implemented in time for next winter.

He confirmed that, under the current proposals, customers will not be automatically moved and will need to contact their energy provider to select the tariff they want. However Jarvis said Ofgem was “looking at all options and whether there will be options in the future to look at defaults for people then we will need to look into that”.

Does this mean cheaper energy bills?

Technically, offering a zero standing charge tariff could reduce energy bills. However, it is not as simple as just moving tariffs – and bills could still remain high.

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

However, he warned consumers that there is a trade-off and lower standing changes will mean higher unit rates – potentially making the switch irrelevant and not actually reducing bills. He said: “Comparing options will be important.”

Citizens Advice head of energy policy Alex Belsham-Harris also warned that low-income households could be negatively hit by the changes if they have high energy needs as the increased unit prices would drive up monthly costs.

Those who use less energy are likely to feel the most benefit as their reduced standing charges will cut bills as their lower energy use will stave off the increased unit prices.

Peter Smith, director of policy and advocacy at the National Energy Action charity, warned that households that use pre-payment meters “could be particularly impacted by the continuation of high standing charges” as they rack up as debt once their credit has been used up – and must be cleared before energy can be used again.

He added: “We know that the higher standing charges are, the longer households are needlessly left without being able to use energy. While several options to better protect prepayment meter households have been identified, Ofgem has not yet opted to do anything, potentially leaving vulnerable households in dire situations.”

Read more

• New £1,782 energy bills warning as millions face higher prices (Bristol Live)

• Energy bills predicted to rise further in April ahead of January hike (Dorset Echo)

• When will energy bills go down? (Yahoo News)