Martin Lewis: Why are energy standing charges so high? What can be done?
Update 26 September 2023: Since this blog was written in July, the regulator Ofgem has announced the new standing charges rate, which will apply from 1 October to 31 December 2023. It will be slightly higher than the rates listed below, yet the principle of the blog remains the same.
Outrageously, most people will pay £300 per year just for the facility of having gas and electricity, even if you don't use any. This is due to the high energy standing (daily) charges. These are a moral hazard and should, at the minimum, be substantially reduced – something I am, again, campaigning with the regulator Ofgem to change. So I wanted to bash out this blog to run you through it.
On Saturday (1 July) the Energy Price Cap – which 90% of those in England, Scotland and Wales are now on – dropped, meaning an average reduction to bills of 17%. Yet that's only a fraction of the story. Let me explain using direct debit as an example:
[Technical note for pedants: we're actually moving from the Energy Price Guarantee to the Energy Price Cap, so the 'from' rates are the old EPG rates.]
- Standing charges remain UNCHANGED (29.11p/day gas, 52.97p/day elec)
- Electricity unit rate has DROPPED roughly 10% (from 33.21p/kWh to 30.11p/kWh)
- Gas unit rate has DROPPED roughly 25% (from 10.31p/kWh to 7.51p/kWh)
As it's the unit rate not the standing charge that has changed, higher users, especially those who use gas, will see a substantially bigger than 17% drop. While lower users (who often tend to be on lower incomes), especially those who only have electricity, will see a substantially lower than 17% drop.
All these rates are regional (and in some areas, the standing charges are much higher, as much as £332/yr) and depend on how you pay. So best to use our Price Cap Calculator to see how yours will change in practice, or see our region-by-region Price Cap rates list.
Keeping the standing charge high means lower users can save proportionately less and less by reducing usage – that disempowers them – and is a disincentive to energy reduction generally, which is not great for the environment.
It also means that prepayment users can find themselves in energy debt in the summer, because they're not using energy but the meter is still ticking over because of the standing charge – a terrible, unnecessary situation for the payment type used by many of the most vulnerable.
I have long campaigned for lower standing charges. MSE has submitted our consultation response to a new Ofgem proposal on this about shifting some of the cost of the unit rates.
The level of standing charges and unit rates, and the split between the two of them, is set by Ofgem within the Price Cap – which applies to firms' standard tariffs (90% of people are on those currently).
While firms are allowed to charge lower standing rates, they cannot charge more than the Price Cap at any level. That makes it tricky for them to increase the unit rate to make up for it. So it's unlikely, as ever since the Price Cap came in, most firms charged within a quid or so of the full Price Cap for their standard tariffs.
This problem was then accelerated by the energy crisis. It led to the standing charge rising by 60% since September 2021, and meant people have far fewer options – as so many firms went bust and almost no new tariffs/fixes were being offered. So far, more people than before are on the Price Cap.
I know some of you will be shouting that energy firms should take the hit themselves. Well, our energy industry was privatised, the nation sold it to private companies whose primary job is to make profits for their shareholders, not to keep us warm. If we want lower prices, we now need to look at politicians and regulators to enforce it.
It's also worth noting that many energy retailers (the firms who we pay for our energy) – which are the ones regulated by Ofgem – are loss-making right now. This is why so many of them went bust. So the practical reality is few are likely to set their standard tariffs at substantially lower rates than the Price Cap.
In fact, in the summit meetings I did last summer with the bosses of the big energy firms, some told in private of their frustration about standing charges. All this is why my focus is on getting the regulator to change.
PS: The firms that make the huge profits are those involved in oil and gas production – think Shell or BP – and that side of their business is not regulated by Ofgem. Though there are firms, like Centrica (British Gas), that do both retail and production.
This is to cover some of the 'fixed costs' of energy, which it believes should be mostly shared equally. The fixed costs are especially loaded on to the electricity standing charge, as that is 'more universal' than the gas one.
These costs have rocketed over the last few years, for a host of reasons, including covering the costs of the energy retailers that went bust (which is about 6% of the standing charge cost), and there have been large increases in policy and networks costs.
I know some will be saying: "I thought it was more about the green levy, or the costs for firms going bust was bigger". Yet some of that is within the unit rate – and what's often quoted is the cost of those things a 'typical user' pays. This is about the standing charge, ie, what you'd pay on zero usage.
Here's a pie chart of how the cost of the standing charge is currently apportioned on a typical dual-fuel bill, according to Ofgem. Many of these are complex mixed costs, I've tried to explain roughly what most of them are, but it's not simple, I just wanted to give you an idea.
There is, in my view, no need to lob as much fixed cost on to the standing charge as we do, some of them can be moved to the unit rate. This is simply about where you place the burden (the discussion of how much burden there is needs to be separate from this).
MSE and I are arguing, in our submission to Ofgem, that there should be a more progressive split – with some cost moved to the unit rate. This would mean cutting usage has more impact on cutting bills – that empowers people to take action that's good for themselves and likely the environment too. I'm not alone on this, in a poll done in June, the vast majority of people favour it...
It should be noted that poll is not of a statistically representative sample, but it certainly shows there are very many people agitated about this issue.
One stumbling block is the argument from Citizens Advice, an organisation I have great respect for. Its understandable and important concern is that if you shift the burden, some vulnerable people with disabilities and medical issues that make them high users will suffer.
Though in the poll we did, even when we asked those with additional needs such as physical or mental health conditions that lead to them having greater energy use, 86% were in favour of either scrapping or lowering the standing charge and moving it to the unit rate.
Of course, the correct solution is to lower the standing charge but give those specific people separate support. Yet that would involve an energy market that wasn't broken, and the regulator and government to operate in concert.
So we're in a chicken and egg situation. Still, on balance, I think the better thing to do is to lower the standing charge (and campaign for help for the high-using vulnerable at the same time).
The energy firm Utilita doesn't have a standing charge, it's currently available as a priority for new prepay customers (though it may allow those on direct debit who call to switch to it).
Instead it charges a much higher unit rate for the first 2kWh of daily use – which effectively works a bit like a standing charge, unless you have absolutely zero or very low usage.
Overall, this means for most users it works out roughly similar to the Price Cap on typical use. Yet for those who are away for very substantial periods or don't use any energy for periods, it could work out cheaper.