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Scrap energy standing charges to keep it simple

A pile of colourful numbers

You may have seen today’s Daily Mail story about the ‘standing charges’ energy companies levy on customers. If you’ve ever read your bill, you’ll be familiar with the term, but what are these charges? Why do they vary?

The British Gas jargon buster on its website describes energy standing charges like this:

‘Suppliers have to pay various costs no matter how much (or little) energy a customer uses. The standing charge is a fixed charge designed to recover these costs.

‘These costs include the distributor’s cost of transporting energy to your premises and the meter operator’s cost of looking after your meter.’

Simple, right? The standing charge is a fixed amount to cover the cost of getting power to your home and maintaining your meter. So you’d think that energy companies would charge a similar amount for all of their customers.

Yet today’s Daily Mail article found two Npower tariffs with different standing charges – a difference that could cost you an extra £140 over the course of a year. Not an insignificant amount. We found another example, British Gas this time, where two different tariffs had total standing charges for a year differing by almost £50. This makes you wonder whether the standing charge really is there to recapture these fixed costs.

Simple prices, not standing charges

Hopefully you’ll have seen our campaign to introduce single unit pricing to the energy market. A single, simple price would allow all of us to compare energy tariffs at a glance. We wouldn’t have to wonder which energy company had both the lowest standing charge and the lowest unit rate. We wouldn’t be scratching our heads working out whether we’d be better off with a high standing charge and a low unit rate, or vice versa.

It would make it clear to all and sundry that one tariff is going to cost you more than another. It would help people to switch to the cheapest deals and stimulate competition in an uncompetitive market.

Continuing with the same old standing charge approach means that people will struggle to find the best offers. And this research clearly questions the energy industry’s claim that standing charges are needed to recover certain fixed costs. Yet, Ofgem’s new tariff proposals will make them mandatory.

The energy market just doesn’t work for the average consumer; people don’t trust their energy supplier and they don’t think they’re getting a fair price. We want people to be much better informed about how much they’re paying. For that to happen, Ofgem and the government need to make sure that simple energy prices are introduced.

We’d love to hear what experiences you’ve had with your energy company’s prices and standing charges. Do you think a single unit price would make energy prices easier to understand?

Comments

Next time you shop at Tesco, examine your receipt. Is there a separate standing charge to cover store maintenance, deliveries, running costs? Of course not! These costs are covered by the mark-up on the products they sell. Why should energy be any different? To me it is obvious that the fairest pricing system *for everyone* is a unit cost only. The more you use the more you pay. If you hardly use any then you hardly pay any. Simple. The standing charge always has been a rip off. It guarantees that regardless of how much energy you use, you will always owe a substantial amount to the provider every period. With a standing charge, cutting down on your usage has less of an impact on your bill, making it harder to be frugal. The concept of a standing charge makes absolutely no sense to me.

“These costs are covered by the mark-up on the products they sell”. Which would mean every unit of energy would carry the mark up for “running costs etc” – so you will pay more to have your meter read, more for your account to be sent to you, more towards your smart meter – and more for the energy companies costs that should be the same for every consumer – if you are unfortunate enough to have to consume above average energy.

We should have the option to pay for the cost of what we consume – the variable cost of fuel, transmission, and the fixed cost of administering our account. Ofgem should ensure the latter is fair. One effect of distorting the unit cost will be to disadvantage many who are higher users in fuel poverty, and be advantageous to better-off wealthy low energy users. Then we’ll get into more complex subsidies to correct this.

Yes, without a standing charge, the unit of energy itself would indeed be more expensive (slightly), but my point is, that is a fairer, more honest way for the energy companies to profit. Simply, if I half my usage, I half my bill. Double my usage and I’ll double my bill. Pay for what you use. What could be simpler? If all energy companies were forced to operate without a standing charge then price comparison would be a walk in the park. Who knows, the energy companies might even become more competitive as they couldn’t hide behind confusing tariffs. Any customer (of any intelligence level) would recognise immediately what the cheapest deal would be, regardless of their usage.

JILL says:
10 October 2016

I absolutely agree that standing charges should be abolished. It makes bills much more complicated than they need to be and makes comparing different energy suppliers’ prices a nightmare. We should pay for what we use, nothing more, nothing less, and just have the price per kw/hour as our method of calculation of our costs. A further point, why can’t the units on gas meters represent kw hours? All meters seem to be different – I had a modern one in my last home, the reading of which I had to times by 11 to get the approximate kw hours, now I have an older meter where I have to times the reading by 31 to get the kw hours – the actual correct method of calculating kw hours is horrendously complicated, surely the meters could be adapted to show kw hours?

Jill, part of your energy bill contains costs that are the same for all consumers on that tariff, whether you consume a lot or a little energy. Standing charges should represent those costs so all “pay what it costs”.

The calorific value of gas (the amount of energy you get from a cubic metre) can vary. It is therefore necessary to measure the volume you use and then apply the correct factor to ensure you pay for the actual kW hours you use as your ordinary meter cannot take a calorific value into account. Maybe smart meters do – £11 billion is what they cost so they should do something useful.

The complication of working out bills is not adding a standing charge to the annual units cost, but doing that for the many potential suppliers. Use Which?Switch that gives you an annual estimate from all energy companies so you can choose the deal that best suits you. Your postcode and annual spend or consumption is all the information you will need.

I agree with Jill.

I inherited a smart meter with my house and that does not take into account the standing charge.

I’m not sure that was Jill’s point; it seemed to concern conversion of cu. m to units and comparing suppliers tariffs. However I see no reason why smart meters cannot take account of a standing charge and even discounts when they are applied daily (as the ones I am on are). I do wonder just what value smart meters have for most people. Will we really religiously watch our hour to hour consumption and then….do what? Turn off the central heating, the dishwasher, use the cooker less? I’d be interested to know from people who have them just how they use them.

Two uses I can see are that
– they provide regular meter readings – saves logging in to your account and submitting manual readings, so getting accurate bills
– and they have the potential to charge you one hourly tariffs – cheaper or more expensive depending upon energy demand and the time of day you are consuming energy.
Will all this be worth £11 billion (out of bill payers pockets, of course)?

My view remains that smart meters should not have been imposed on us. I have seen some of the advertising and the companies are implying that they are doing us a favour by fitting a ‘free’ meter.

I had intended to decline the offer of a smart meters on principle, but inherited them when I moved home. It was interesting to find out just how much it costs to heat a tank of water using the gas boiler. Fortunately the new fridge and freezer have proved more economical than I had expected. My biggest savings have been to turn off radiators in unoccupied rooms and to replace halogen bulbs with CFL and LED ones. The novelty wore off when the power supply for the smart meter was recalled and I have yet to explore its potential and limitations.

Having seen how energy aware people can become when they have solar panels installed, perhaps some will make good use of their smart meter display when they can see how much their energy is costing.

Kiran says:
12 January 2018

We are being penalised for Buying and Living in Energy efficient homes due to the standing charge. The whole purpose of building Energy efficient homes or upgrading homes to be energy efficient is to minimise the energy usage. However, being a less energy user makes you pay more. Shame.

You can choose a tariff without standing charges. The unit prices will generally be higher than a tariff with a standing charge. The best thing to do is to put your expected energy use (kWh per year) into a price comparison site like Which?Switch and find the supplier and plan that gives you the best annual cost.

Do remember that there are fixed costs associated with the supply of energy to your home – less than 40% of your bill is actually for raw energy.

Of course, those with more energy-efficient homes will, by consuming less energy, pay less in a year, not more, than those who are less fortunate.

Dennis Lee says:
3 December 2018

Just moved into a new build apartment, no prior info until first bill has arrived. Standing charge 81 pence per day, (£300 per annum approx). 67 apartments in the building, total cost almost £20,000 per year.
New legislation (EED) regarding smart meters makes it clear that end users should be in control of their energy usage but it’s not possible to control standing charges. How can consumers be more energy concious and reduce usage with these pre-set charges. Any attempt by the government to cap charges are being circomvented by energy suppliers simply adjusting upwards their standing charges. Standing charge is for the cost of having an energy supply, (ie. ACCESS to ENERGY) only one gas pipe and one valve into the building, why 67 standing charges.

Patrick Taylor says:
3 December 2018

Interesting point as to the legitimacy of charging all flatdwellers a standing charge IF the responsibility of the supply ends once the building is reached. However if the responsibility for supply is to each individual flat then it is similar to terraced houses.

But then a sub-station and cabling have beeen installed and these capital costs are separate from units supplied. As you can imagine a block of flats that is selling badly may never generate income, particularly if, as happened in London, overseas investors bought flats and kept them empty waiting for a capital gain.

One wonders what the case is for industrial units.

The case for a standardised national connection cost has been much discussed and to be honest I think the simplification of having it would be beneficial for everyone. That there should be a standing charge is explained by the fact that keeping the infrastructure in working order has to be paid for regardless if anyone buys any units of energy.

Dennis Lee says:
3 December 2018

Smart metering is being installed all over Europe and the intention is quite clear to promote end user control regarding the amount of energy they choose/need to use but no amount of careful usage will work for the end user if the energy suppliers get around the loss of profits by simply switching and increasing income via standing charges. In this building there is one pipe and one meter measuring the amount of gas imported, gas is not supplied to individual end users, rather smart/sub-metering of heat usage by end users is recorded and charged for.
With energy, the standing charge is the cost of having a gas and electricity supply – then you pay usage charges on top. Therefore the standing charge is the fee you pay to your energy supplier simply because it gives you access to energy. In this building 67 customers pay (81pence per day) for this access (around £20,000 per annum for standing charges alone) I fear what we have discovered here is just the tip of the iceberg and countless others will find as their contracts run out and they switch supplier/or not they will discover the exorbitant hidden costs of getting energy supplied.