Ofgem’s original (Nov 2023) call for input on standing charges got 30,000 responses, with most calling this pricing system regressive and unfair. Our most recent call for input on alternatives to this system got about 300 responses. We had set out three alternative ways to allocate fixed costs: by volume of use; by ability to pay; or by contribution to peak demand. The team is now working through these responses: some want to abolish standing charges entirely and have all fixed costs recovered through a simple (and high) unit rate; others have argued for a more cost-reflective system which encourages electrification by keeping unit rates low; and system cost reduction by lowering peak use. Views on ability to pay are also mixed: some would prefer the Government to deal with this outside the price mechanism through welfare payments or targeted bill discounts. Others would build progressiveness into the price mechanism by (for instance) grading the unit rates or fixed charges by income or wealth. This is a complicated question and so the diversity of perspectives on this is both natural and welcome. I wanted to take a moment to say a HUGE thank you to everyone who took the time to think through these difficult issues and respond. Please do stay engaged with this project. There is a lot at stake here for consumers. As a conceptual framework for thinking about where we go next with this, I wanted to offer a couple of thoughts and would welcome views. It is useful to think of the fixed costs of the energy system (across generation, networks and supply) as either avoidable or unavoidable (or sunk). If costs are unavoidable, then the main economic consideration is to recover them in ways that cause the least distortion to production and consumption decisions across the economy. This is certainly very important when we think of cost allocations to the business sector. But for households, there is clearly an additional need (well articulated by the 30,000 responses) to ensure fairness in cost allocation. The challenge for the team is to work out what exactly this means. We can safely infer so far that asking all households to contribute equally to fixed costs is not seen as fair. If costs are avoidable, then other interesting possibilities open up. For instance, much of the fixed costs of generation and network could in principle be avoided in the medium to long term even with large scale electrification so long as peak demand was kept low. This gives us some intuition that our existing pricing system - which allocates the fixed costs of generation to the unit rate and the fixed costs of the network to the standing charge - is unlikely to be the most efficient system of pricing. But will consumers (particularly households) respond to peak pricing signals? This is the subject of an ongoing trial we are carrying out to gather some real-world experimental data on consumer preferences and response.
Let's face it - not even private profiteers like Tesco load up an equal share of their fixed costs on a pensioner with a little basket of essential food as an affluent family with a huge trolley full. There is no standing charge for access to food, but there is to energy. And it's not just unethical, I'd question the economics. It seems unlikely that the distribution costs for a single block of 100 flats is really the same as 100 mansions. Also factor in the mansions will use a lot more energy. Higher electricity demand loads extra network and wholesale costs on everyone. If we were all low electricity users in flats the cost of electricity would be lower not higher! Worse still, the mansion probably has an EV which dramatically reduces their unit cost, whilst the flat with storage heaters pays more even though they are using a lot less peak energy. A fairer energy pricing system is long overdue!
#2 of 2 4. Linking a fixed charge to capacity or max demand has merits, given these are proxies for use of the system. It is clearly unfair that a one bed apartment pays the same standing charge as a 7 bedroom house with a heatpump and EV, given they both have very differing benefits and impose differing fixed costs on the system. Good to look at other models in europe. France is interesting.. a post below with some of my limited research wrt that market. https://www.linkedin.com/posts/andrew-chittenden-84083b1_standing-charges-are-getting-increased-attention-activity-7378467872446259202--kS6?utm_source=share&utm_medium=member_desktop&rcm=ACoAAABNMfABCaZc6dXybyM_njuaE10r5sCaxKg
#1 of 2 Akshay, Good to see you set out your thinking transparently, and asking for input. A few thoughts in no particular order. . over two comments; 1. The system we are moving to is increasingly fixed cost which needs recovery. It is somewhat a function of history how we consider some elements (fixed cost in networks) as standing charges, and others such as fixed costs of wind infrastructure as being part of the unit rates. 2. Recovering all fixed costs through unit rates has a number of perverse incentive issues as you allude to, and though seemingly progressive, might not actually be so. It allows those of us with solar and batteries to opt out of a lot of cost for assets that we still need on the on the cold, dark days. Meaning that others with no such optionality are opted in. 3. I am very sceptical that the tariff should be used as social policy, by linking to wealth or income. A huge amount of complexity for suppliers, lots of gaming opportunity, and makes the bill even more political. Welfare should be welfare, I suggest. That does not however mean that structures could not be fairer. .. to be continued...
Paul Fuller
3d
Hi Akshay. Great to hear your thoughts. You said “We can safely infer so far that asking all households to contribute equally to fixed costs is not seen as fair.” I think a lot of people who don’t use a lot of energy see it as unfair and have made that point quite clearly. However there’s another cohort of customers who are benefitting from the standing charge and remain silent. That doesn’t mean they’ll stay silent in the future. Our worry is that any radical change in this space will simply substitute one unhappy cohort of the population for another and we’ll be back here again in a couple of years. There was a lot of thinking about fairness as part of the TCR, yet it also has contributed to the higher standing charge we face today. Investors from the largest, down to individual households need certainty and predictability. Whatever change is made, it needs to stick and that would point towards a conservative approach to reform.
Pre-liberalisation, ESB had a bundled Winter Demand Reduction Incentive tariff for mid size commercial consumers; with a per-kWh element and a per kW max demand element. BUT the MD register was only recording 4-7pm on winter weekdays, max demand was not recorded outside that window. As customers switched away to other tariffs the system peak demand was growing at 8%pa (double the rate of demand growth as I recall) We (now AFRY, then ILEX) created an equivalent scheme WPDRS for ESB National Grid (now EirGrid) to mimic the incentive to reduce demand in these hours. Is this an example of a suitable model? Happy to share further thoughts
Appreciate you sharing your thinking and experience on this. Very timely and relevant to our considerations on the pricing review at the Australian Energy Market Commission (AEMC). Thanks Akshay Kaul
Well said Akshay. It's good to reflect on the roles and needs of the different segments. Not all households can meaningfully participate to system flexibility. For that segment, it's likely OK to have higher unit rates and low standing charges. Then there are households that can meaningfully respond to price signals, also - if not chiefly - through aggregators and optimisers. These households tend to have EVs, heat pumps, batteries. And I speculate they are also the households that worry less about their electricity bills. Maybe higher standing charges would be well received, in exchange for the possibility to meaningfully participate in flex markets? But I think it's less controversial to look at larger commercial and industrial users who often can (a) respond to price signals (again, possibly through VPPs etc) and (b) have an interst in doing so as they actively manage costs. For these, the current system is wholly inadequate, as it absolutely kills the business case for electryfing and cutting CO2. I wrote about it recently and would of course be interested in your thoughts: https://www.linkedin.com/posts/elian-pusceddu_rema-ofgem-desnz-activity-7386344754160013313-7yGp
Director of Policy at Stonehaven
4dThank you for putting your thinking here, it's great to see such transparency. I would perhaps note in your last paragraph that 'customers' responding to peak pricing is perhaps not the right test: is the market free to provide automated services that do this on their behalf, and to what extent are consumers willing to take these up? We do not have to assume that the value of peak pricing is purely about people switching things on and off manually.