Ofgem proposes to ban fixed daily energy charges - what it means for your bills

Every energy supplier could be required to offer tariffs with low or no standing charges, under new proposals from the market regulator.

Ofgem has launched a consultation into whether to introduce an option under the energy price cap that will mean standing charges are altered, in a bid to keep bills easier to manage or pay back debt.

But how would this work and could it save you money?

Standing charges pay for the fixed costs to suppliers of providing energy to homes.

Under Ofgem’s price cap, standing charges have risen by 43 per cent since 2019, and as of January this has cost dual-fuel households an average of £338 a year.

Those who use little energy are hit harder proportionally. This is because they will still have to pay the same standing charges as households that use less gas and electricity.

This often affects people who live alone or are vulnerable and find that lowering their heating usage still does not result in a much lower bill.

From 1 January to 31 March this year, it costs 60.97p for the daily standing charge for electricity and 31.65p for gas.

Customers on prepayment meters face the same standing charges as those that pay by direct debit.

The new consultation lays out the options under consideration for how a low or no standing charge would work in practice. These will be consulted on until March 2025.

Ofgem has made it clear it cannot remove the costs that make up the standing charge from the system – it can only be moved from one part of the bill to another.

Essentially, this means tariffs with no standing charge will have a higher unit rate.

However, those who are low energy users, such as vulnerable households, could save money as they will not have to pay an outstanding charge when not using energy.

The options it has suggested include:

The consultation follows an options paper published last year on a number of short-term options to reduce standing charges.

One of the main issues is that even if the plan is implemented, households would have to opt in to a tariff with lower or no standing charges – they would not be put on one automatically.

Many may be unaware or concerned about how to do this and so would avoid doing so altogether.

People will also still have to take care of their energy bills and how much they are using – it will not automatically reduce bills, especially for those with higher usage.

If households are aware of the changes if, and when, they come into force, they could potentially save hundreds each year by monitoring their energy usage.

There are also now several fixed deals that are below the current price cap level – which is £1,738 per year.

As it is expected to increase as of April by around £100, according to forecasts, it could be worth considering fixing now before this kicks in.

However, should prices come down in future, households will be locked into a higher rate.

Martin Lewis, founder of MoneySavingExpert, said: “This is progress. Standing charges are by far the most complained-about part of an energy bill.

“They’re a moral hazard that disincentivises lower users from cutting their bills, and leaves many older people, who only use gas for heating in the winter, still paying for it every day in summer.

“However there is one big hole in what’s currently proposed. The new ‘low or no standing charge’ price cap option should reduce costs for lower users but to get it, people have to opt in.

“In our consultation response I will propose that firms must move vulnerable lower users to the ‘low or no standing charge’ tariff by default (using an opt-out mechanism) if their prior year’s usage indicates they would be materially better off on it than the standard price cap.”

Richard Neudegg, director of regulation at Uswitch.com, added: “Ofgem’s consultation about possible zero or low standing charge tariffs options by next winter might bring in a good option for some lower consumption households. But as ever, the devil will be in the detail.

“Consumers shouldn’t be under the illusion that under the price cap Ofgem will be able to reduce the much-hated standing charges without a trade-off elsewhere in the rates.

“If there is an option with lower standing charges under the price cap, there will be higher consumption based charges instead. Comparing options will continue to be essential, as different options will work best for different households.”