Standing charges being used to offset energy price reductions

rjd185

The standing charge seems to be providing energy suppliers with a way to keep their revenue stream up i.e. bills high, even as the prices of energy falls. Possibly not a major revelation but it is noticeable in the current market conditions that energy bills are driven by the economics of the companies rather than the cost of the energy. Given the cost to the average consumer is within a few pounds per year even with standing charges varying by up to 50% lowest to highest, when does this careful balance of unit charge and standing charge to produce a fixed, unvarying cost to the consumer stop being good economic planning and start being price fixing by the energy suppliers?

In the last month, the EDF-22 tariff has dropped the per unit charge by 11% (2.567p/unit to 2.273p/unit) and has increased the daily standing charge by a whopping 33% (20.475p/day to 27.342p/day). I've been actively looking to take advantage of falling oil prices this year so was surprised to see that there has been zero change in our potential savings even though the actual wholesale energy markets were in near freefall for a time.

This creates quite perverse conditions with respect to the energy cost versus energy usage and incentives to reduce domestic energy usage (is this an Ofgem topic?).

With the standing charges being raised while energy prices fall, there is a reduced financial incentive to decrease energy usage and it favours the heavy users financially. We live in a horribly inefficient 1930's, solid-walled house with insulation etc where we can but we are still very heavy users of domestic energy as a result especially in winter (we are more than 2x Ofgem's TDCVs for High usage). We are favoured by any reduction in the unit price almost regardless of standing charge.

For example, with the oil price falling now, on EDF's changes (unit price down 11%, standing charge up 33%), we can still save as much by switching because the unit price has the biggest influence by far. But the standing charge hike means the net saving is unchanged, and for any Medium domestic users (from the TDCV) it would cost more now even with lower oil prices, because the standing charge increase has overridden any possible savings. As a quick sample, Tonik offers a daily standing charge of 17p/day on their GSPv3 12 month, Shell Energy close at 17.3p/day, Avro 20.3p/day on Simple/mPower 12 month, and these all offer me effectively the same annual cost as EDF on 27.3p/day. The only zero standing charge option on the site (EBICo) isn't a better (cheaper) option for anyone under any usage profile beyond near zero annual use!

Now EDF's changes are most noticeable because the standing charge changed so much, but the presence of the standing charge does seem to be the tool by which suppliers are manipulating the total bill to generate an income that is independent of the actual energy price available. Maybe it is time for Ofgem to go the next step and look at dropping the standing charge completely - at least that would transfer more of the cost to the heavier users like me and away from people who need to benefit financially from minimising their usage.

Kitchen_Sink

rjd185 said:

The standing charge seems to be providing energy suppliers with a way to keep their revenue stream up i.e. bills high, even as the prices of energy falls. Possibly not a major revelation but it is noticeable in the current market conditions that energy bills are driven by the economics of the companies rather than the cost of the energy. Given the cost to the average consumer is within a few pounds per year even with standing charges varying by up to 50% lowest to highest, when does this careful balance of unit charge and standing charge to produce a fixed, unvarying cost to the consumer stop being good economic planning and start being price fixing by the energy suppliers?

In the last month, the EDF-22 tariff has dropped the per unit charge by 11% (2.567p/unit to 2.273p/unit) and has increased the daily standing charge by a whopping 33% (20.475p/day to 27.342p/day). I've been actively looking to take advantage of falling oil prices this year so was surprised to see that there has been zero change in our potential savings even though the actual wholesale energy markets were in near freefall for a time.

This creates quite perverse conditions with respect to the energy cost versus energy usage and incentives to reduce domestic energy usage (is this an Ofgem topic?).

With the standing charges being raised while energy prices fall, there is a reduced financial incentive to decrease energy usage and it favours the heavy users financially. We live in a horribly inefficient 1930's, solid-walled house with insulation etc where we can but we are still very heavy users of domestic energy as a result especially in winter (we are more than 2x Ofgem's TDCVs for High usage). We are favoured by any reduction in the unit price almost regardless of standing charge.

For example, with the oil price falling now, on EDF's changes (unit price down 11%, standing charge up 33%), we can still save as much by switching because the unit price has the biggest influence by far. But the standing charge hike means the net saving is unchanged, and for any Medium domestic users (from the TDCV) it would cost more now even with lower oil prices, because the standing charge increase has overridden any possible savings. As a quick sample, Tonik offers a daily standing charge of 17p/day on their GSPv3 12 month, Shell Energy close at 17.3p/day, Avro 20.3p/day on Simple/mPower 12 month, and these all offer me effectively the same annual cost as EDF on 27.3p/day. The only zero standing charge option on the site (EBICo) isn't a better (cheaper) option for anyone under any usage profile beyond near zero annual use!

Now EDF's changes are most noticeable because the standing charge changed so much, but the presence of the standing charge does seem to be the tool by which suppliers are manipulating the total bill to generate an income that is independent of the actual energy price available. Maybe it is time for Ofgem to go the next step and look at dropping the standing charge completely - at least that would transfer more of the cost to the heavier users like me and away from people who need to benefit financially from minimising their usage.

Welcome back to MSE!

You cannot look at individual components of any tariff. Different suppliers take different approaches with their tariffs.
e.g. in the past (although not sure if available now) there used to be a tariff that was an 'all you could eat' tariff for a suma greed with you. So that was effectively just a standing charge and zero unit rate charge.

Even today, there are still tariffs with zero standing charges, but high unit costs.

You need to compare the cost of the entire tariff for your usage, and choose the best deal for you, and that is where comparison sites come in really handy.
https://www.moneysavingexpert.com/utilities/you-switch-gas-electricity/

matelodave

As KS says, the charges are split between the cost of the energy and the standing charge but in the end you have to pay for both. Some of us who are old enough remembered when the first couple of hundred kw a year were priced at two or three times the remaining ones to recover the standing charges but Ofgem changed all that because it confused people and as usual those who were only low users felt that they were being penalised for paying more for their lower consumption.
Although as even more usual, they should have been aware of what they asked for because many people ended up paying more as they didn't always use enough energy to cover a years worth standing charges but the new pricing structure meant they did, plus the cost of the energy on top. People now have to pay s/c if they've got a meter even if they don't use any energy.

However suppliers are now free to apportion their standing charges and energy cost in a way that can be an advantage to them but can also be advantageous to the customer - generally it doesn't make a tremendous difference to those on average consumption but those with a low to very low consumption might find it better to pay a low or zero s/c and a higher unit rate whereas others (like me) benefit more from a higher s/c but lower unit rates. So you need to do your sums based on your annual consumption and cost. Going for a low s/c could actually cost you a lot more unless you work out your consumption.

For example I use 7000_kwh of leccy a year so an extra penny a kwh cost me £70 extra, however even an extra 10p/day on my s/c only adds £36.50 to my annual bill so I'm happy to pay a high s/c in favour of cheaper unit's (as it happens my present Symbio tariff is only 15p a day and 11.5p/kw so pretty cheap anyway)

JJ_Egan

Its an old old topic .

S/C vary between 5p and 25 p of those i looked at last week .

Old method of standing charge was xxx of first units used at a higher per kwh price ,that confused just as many as current method .

rjd185

Kitchen_Sink said:

rjd185 said:

<blah>

Welcome back to MSE!

You cannot look at individual components of any tariff. Different suppliers take different approaches with their tariffs.
e.g. in the past (although not sure if available now) there used to be a tariff that was an 'all you could eat' tariff for a suma greed with you. So that was effectively just a standing charge and zero unit rate charge.

Even today, there are still tariffs with zero standing charges, but high unit costs.

You need to compare the cost of the entire tariff for your usage, and choose the best deal for you, and that is where comparison sites come in really handy.
<link removed - I don't post enough here to quote it>

Agreed and it would be invalid to do so - and just to be clear, the assessment above doesn't. It is based on the entire tariff, not on just one element, which is why I've commented on the simultaneous reduction in unit price and increase in standing charge across multiple tariffs. The observation is that by modifying both parts of the tariff, the net cost to the consumer is broadly unchanged even though costs on the wholesale energy markets are reducing (changing), while also diminishing the incentives to reduce usage.

For example, two months ago I could save about £400 per year by switching - I didn't because I expected oil prices to take a dive. However, following that predicted reduction in oil prices, I can now save, surprisingly, about £400 per year by switching. When analysing the offers being made, there was no change with EDF because the reduction in unit price is offset by the increase in standing charge. The same is true over that period for other suppliers.

What should also be of interest is that there is a wide variation in the daily standing charges (17p/day up to 27p/day for gas, less for electric), and decent variation on unit charges (2.1p/unit to 2.7p/unit or +29% on gas, 13.2p/unit to 15.1p/unit or 14% on electric), for reasonably comparable tariff types that I selected, yet those numbers all coalesce around a relatively unchanging number for a competitive tariff. So if you want a 12 month fixed-price dual fuel tariff with high usage, there are eight companies separated by less than two percentage points of my annual bill with significantly different daily standing charges and unit prices all managing to hit the same price point.

The implication is that the tariffs are established by economic and business models, not the actual costs of doing business plus a margin. As I said, this isn't surprising (these companies must determine a viable economic basis for maintaining a business, and aggregation at the competitive end of the spectrum is to be expected if there is any competition). But that then means the justification for the standing charge is diminshed completely - it isn't relevant to the charging model for consumers. Removing it wouldn't change the economic imperative for energy suppliers to maintain revenue, but it would mean that consumers at the lower use end of the market would benefit (and the profligate users like I am would pay a fairer share of the energy consumption bill).

matelodave

If you consider that the standing charge is there to help pay for the cabling and piping from your house back through all the infrastructure to the generation and distribution network, together with the maintenance of it all would it also be reasonable to increase the cost for those who live further away from the power station as they are using more of the infrastructure as well. It's a more valid an argument than yours, unless you feel that by using more leccy that you are wearlng out the generation capacity a bit faster than someone who doesn't use as much. You could even end up paying more depending on which end of the street you live

I'd also guess that some of the s/c contributes towards the bill and other relatively fixed costs so does it cost less to send a bill to someone who used less energy than those who use a lot.

In the end we are all contributing towards the fixed costs on a reasonably equitable basis, otherwise there would be a lot of people out there who would not be able to afford to have power run all the way to their homes or have their supplies maintained when the network suffers damage.

How a about a call out fee when the power goes down. Who should pay, the guy who calls them out or the whole street or neighbourhood that may have been affected. Why should those who aren't affected have to pay for you to get your supplies restored. You really do have ti think some of this stuff through

rjd185

matelodave said:

As KS says, the charges are split between the cost of the energy and the standing charge but in the end you have to pay for both. Some of us who are old enough remembered when the first couple of hundred kw a year were priced at two or three times the remaining ones to recover the standing charges but Ofgem changed all that because it confused people and as usual those who were only low users felt that they were being penalised for paying more for their lower consumption.
Although as even more usual, they should have been aware of what they asked for because many people ended up paying more as they didn't always use enough energy to cover a years worth standing charges but the new pricing structure meant they did, plus the cost of the energy on top. People now have to pay s/c if they've got a meter even if they don't use any energy.

However suppliers are now free to apportion their standing charges and energy cost in a way that can be an advantage to them but can also be advantageous to the customer - generally it doesn't make a tremendous difference to those on average consumption but those with a low to very low consumption might find it better to pay a low or zero s/c and a higher unit rate whereas others (like me) benefit more from a higher s/c but lower unit rates. So you need to do your sums based on your annual consumption and cost. Going for a low s/c could actually cost you a lot more unless you work out your consumption.

For example I use 7000_kwh of leccy a year so an extra penny a kwh cost me £70 extra, however even an extra 10p/day on my s/c only adds £36.50 to my annual bill so I'm happy to pay a high s/c in favour of cheaper unit's (as it happens my present Symbio tariff is only 15p a day and 11.5p/kw so pretty cheap anyway)

For reference, on the zero standing charge, there do not appear to be any such tariffs that are economically better at any consumption level except extremely low usage because the unit charges are so much higher. Again there is no problem with that model - it is economic modeling for a business, rather than a reflection of the intrinsic direct plus indirect costs of supplying energy in the UK, but it is still dealing with cost/margin concepts. Either option could be used as a valid business model. But this further underscores why the standing charge concept itself is now just a billing concept and has no relevance to provision of energy to consumers other than to provide some differentiation of tariffs even when the actual consumer cost ends up being the same, to create some level of opacity on the billing (helpful for customer retention), and to support a narrative that unit costs are fluctuating with energy prices while keeping net revenue per customer for the supplier relatively unchanged.

Zero standing charge tariffs do seem to be thin on the ground anyway so these are really niche options at the moment. EBICo is the only one on MSE and there the break-even point appears to be about 1200kWh electricity only per year, or about 4000kWh gas only per year, or combined an example would be 3200kWh gas with 300 kWh electricity. The Ofgem TDCV lowest rank is about 9800kWh combined gas and electric so about 3x that breakeven 3200/300 gas/electric example on the zero standing charge energy usage. So it is outside 'normal' consumer usage in this country but it could appeal to a very low user with an interest in reducing usage even further. (I didn't look at pre-pay meter options FWIW.)

rjd185

As an aside in terms of 'money where mouth is', I did switch - to EDF, even with their high daily standing charge. For high usage consumers the standing charge has little impact, and as a heavy user, I definitely benefit from lower usage customers paying their standing charges so the suppliers will offer reduced unit charges.

rjd185

matelodave said:

If you consider that the standing charge is there to help pay for the cabling and piping from your house back through all the infrastructure to the generation and distribution network, together with the maintenance of it all would it also be reasonable to increase the cost for those who live further away from the power station as they are using more of the infrastructure as well. It's a more valid an argument than yours, unless you feel that by using more leccy that you are wearlng out the generation capacity a bit faster than someone who doesn't use as much. You could even end up paying more depending on which end of the street you live

I'd also guess that some of the s/c contributes towards the bill and other relatively fixed costs so does it cost less to send a bill to someone who used less energy than those who use a lot.

In the end we are all contributing towards the fixed costs on a reasonably equitable basis, otherwise there would be a lot of people out there who would not be able to afford to have power run all the way to their homes or have their supplies maintained when the network suffers damage.

How a about a call out fee when the power goes down. Who should pay, the guy who calls them out or the whole street or neighbourhood that may have been affected. Why should those who aren't affected have to pay for you to get your supplies restored. You really do have ti think some of this stuff through

Suffer a power cut and live in the south east of England? Call the UK Power Networks, not EDF or your retail 'supplier'. We call Western Power Distribution and have or would have done with supplier being Npower, EDF, e-On, myEngie/Octopus and soon, EDF again. I can't paste a link, but look up 'Distribution costs on your electricity bill' on ukpowernetworks.co.uk for a decent explanation.

Have a look at the charging model between the distribution networks and the energy suppliers, and how that interacts with actual infrastructure maintenance. The significant capital and operating costs of maintaining the power distribution networks is rolled up as a Distribution Use of System charge from the distribution company (DNO) which doesn't have any impact on the energy supplier domestic tariff models. The separate distribution cost is already being passed on to the consumer rolled up in whatever is paid each month but it isn't directly reflected in the prices/tariffs that retail, domestic consumers pay. (And that distribution cost is kept separate to avoid all the problems you describe above.)

The daily standing charge on the consumer bills has nothing to do with any aspect of distribution networks any more - it's a cost recovery mechanism for consumer billing by the energy supplier not the distribution network. The daily standing chargehas only a loose, indirect link to distribution networks or the cost of running those. It also has no defined link to any aspect of the energy supplier's fixed costs either other than as a source of revenue which is why Ofgem made standing charges optional some time ago - energy suppliers work out all their costs, look at their consumer base and business plan, then set unit and standing charges in tariffs to recover what they need to from the retail consumers over the longer term (gets more complicated when looking at energy futures, consumer retention rates, links between energy suppliers and generators, shareholder demands, government policy projections, etc but the principle remains).

The DUoS charge is the financial mechanism by which the infrastructure cost is passed from the DNO to the energy supplier, who is then responsible for recovering that cost plus their own costs plus their profit from their consumer base and other business interests in whatever manner is permitted by Ofgem. The separate DNO charging methodology to the supplier is described on Ofgem's web site and that is the result of the various stakeholders thinking all the implications through (for our deregulated model).

rjd185

Worth a note on the non-distribution related costs as well.

Ofgem also defines 'efficient costs' for the energy suppliers' operations. The detail of this I don't know (see the Ofgem website) but it is the mechanism by which Ofgem sets the upper limits on how much an energy supplier can say they need to spend on all the non-distribution aspects of the business (expressed mostly in the default tariff price cap I think). So things like customer contact, billing and payments, metering, sales/marketing and a few others I can't recall are quantified for an efficient supplier and the actual supplier can't, for example, pay an extortionate amount to an outsourced meter reading company owned by their parent company, and report that as a valid cost while the meter reading company reports a big profit outside the regulation.

There's a lot more complexity in actually running such an organisation but that's why energy suppliers pop up without any significant infrastructure.

It's also why the daily standing charge is not inherently bound to either energy distribution or funding those consumer services provided by the energy supplier. It is just a part of the tariff sold to consumers to recovery any costs incurred.

Bottom line - worth looking at removing or reducing the standing charge with regulation to control the change, to determine if lower use consumers would benefit by its removal (or significant reduction) and if that benefit would tend to favour lower income consumers. Based on what tariffs are available today at least here and on uSwitch, that appears to be the case.