Standing charges are billed to households every day, regardless of whether they turn the lights on or not.
But the so-called ‘flat tax’, introduced in the 1930s to prop up energy regulation, has come under heavy scrutiny in the past four years, after doubling during the energy crisis.
Now both Labour and the Conservatives have committed to reviewing the charge in their manifestos.
Rishi Sunak’s government has said it will “review” standing charges “to keep them as low as possible”, while Labour’s manifesto said “too much of the burden of the bill is on standing charges and we will work with the regulator to reduce them”.
Like unit rates, which dictate how much you are charged for your actual usage, standing charges are governed by the energy price cap set by regulator Ofgem. Though they vary slightly by region, the average standing charge is £334.08 a year for gas and electricity, while those not on the gas grid pay just £219.42.
But when energy costs soared in the wake of Putin’s invasion of Ukraine, households struggled to reduce their bills. This left vulnerable households particularly exposed.
While Labour has vowed to reduce the bill, critics have warned that Labour’s pledge to achieve full decarbonisation by 2030, could make this promise almost impossible. Others have warned it would just lead to higher unit rates.
Dr Craig Lowery, of analyst Cornwall Insight, said the cost of net zero had been slowly shifted away from unit rates onto standing charges.
Ofgem has not denied this. The regulator admitted the charge goes towards powering networks, and the infrastructure upgrades needed to hit net zero but that standing charges would be “a matter for the next government”.
A consultation into the daily rates has been in the works since November, with the findings due to be published by the end of summer.
‘Older homes face a new net zero tax’
Britain’s energy transmission provider, National Grid Electricity System Operator, (NGESO), has set out plans for a £58bn expansion to the UK’s high-voltage transmission network, which would include thousands of new electricity pylons, substations, and other infrastructure spread across the countryside.
Future Energy Associates, which conducted a report into standing charges last year, said one way a government could hit its target whilst reducing standing charges could be by shifting the burden onto unit rates.
The report suggested that energy suppliers’ operating costs should be paid for by usage, rather than a flat daily charge, “thereby delivering an incentive to the energy market to drive down excess costs such as marketing”.
But put simply, this means that should standing charges go down, unit rates would have to rise. The likely result would be that households using more energy than others would see their monthly payments rise even further, while those who use less would see their bills drop.
Dr Lowrey, of Cornwall Insight, warned: “This would potentially have detrimental impacts on high electricity-using households, those with energy inefficient properties, and those which use electricity for heating, and those in fuel poverty. As such, broader consequences will have to be considered.”
Future Energy Associates said the next government could raise the revenue through general taxation as an alternative.
Labour has been reluctant to commit to tax rises. If the party were to move all or some of the standing charge cost to general taxation, bills would fall immediately, but households would still shoulder the cost through other taxes.
Dr Lowrey said this is a possibility, “but it would have to be managed in the context of a new government with other pressures on the public finances”.
Tim Jarvis, Ofgem director for markets, said: “We know that standing charges have provoked a huge amount of debate in recent months, and with wider cost of living pressures meaning customers will continue to struggle with bills, now is the right time to look at this again.”
Not all suppliers demand users pay standing charges, and instead charge a higher unit rate. Suppliers are also allowed to charge less than the price cap rate, although this is also typically offset by higher usage costs.
A number of energy bosses, including Centrica’s Chris O’Shea and E.ON’s Chris Norbury, have called for standing charges to be scrapped entirely.
Mr O’Shea said: “We think it’s really unfair that many customers have no option but to pay a fixed charge per day for their energy, regardless of how much energy they actually use. The standing charge hits people who are careful about their energy use hardest – and these people are often from low-income households, and prepayment meter customers in particular.”
“It’s a complex issue and while an upfront set fee to cover a supplier’s fixed costs works for some, it doesn’t work for others,” said Mr Jarvis. “Equally, spreading the costs differently might help some but our previous analysis has found it can also penalise some really vulnerable households.”
Simon Francis, of the End Fuel Poverty Coalition campaign group, said: “Standing charges are an unfair flat tax on every energy consumer. Every household pays through the nose just to be connected to the grid, even if they use no energy.”
‘Households will pay either way’
The fact remains that at some point, Britain will need to ramp up its investment in infrastructure to meet Labour’s goals, and that means households will have to pay for it.
Those in favour of ploughing more money into grid upgrades and renewables argue that doing so will save households money in the long run, but it will doubtless be unpopular with billpayers already fed up with standing charges.
The ramifications of keeping bills down to placate households can be seen all too well in the way Britain’s water infrastructure has fallen apart. Until last year, household water bills had remained flat or fallen in real terms for 15 years, leaving suppliers with very little cash left to improve infrastructure.
At the time, Sir John Armitt, of the National Infrastructure Commission, which advises the Government on infrastructure projects, said households would end up paying for the necessary improvements either way – it was just a question of what form that payment would take.
“The reality we have to face is there has been underinvestment for a very long time. The focus from government and regulators has been to keep bills down,” he told the Today Programme.
He continued: “You could argue that bills are going to have to go up sooner or later to pay for the decline in investment, whether that’s through a nationalised company and we’re paying as general taxpayers, or through private companies and we pay through bills.”
Those in the energy world are clear consumers will eventually have to foot the bill to reach net zero targets for network upgrades.
“Standing charges should support the investment in the electricity network necessary to enable greater energy security through more renewables, electrification, and broader decarbonisation,” a spokesman for Energy Networks Association said.
“We support any review which aims to ensure customers are charged fairly and appropriately.”
Source Agencies
