Energy UK response to Ofgem’s Cost Allocation Review Call for Input

Executive Summary

We welcome Ofgem’s acknowledgement that the current allocation of costs leads to some unwanted consequences and may not be optimal for delivering an efficient market under a clean power system.
This review should prioritise the conditions for energy retail to develop and offer products that send cost-reflective, forward-looking signals that drive system efficiency, lower carbon emissions, and enable better consumer outcomes. However, we are concerned that this does not appear to be the current focus of the review.

Energy UK has three key concerns with the review’s direction:

• Ofgem will be unable to deliver the necessary system change, which requires Government to play a central role;
• A short-term and narrow focus on social acceptability of the standing charge-unit rate balance;
• The lack of consideration of the role of competition and consumer engagement in delivering system efficiency.

Perhaps the most concerning element is the scope for prescriptive generic tariff obligations on suppliers, such as rising or falling block tariffs or zero standing charge tariffs. Without nuance and careful tailoring, consumers, including those in vulnerable circumstances, are likely to lose out, as in Ofgem’s proposed mandation and introduction of low standing charge options before the conclusion of this review. As Ofgem evidence suggests, simply increasing unit rates could make 2.3 million low-income households worse off¹. It will also likely damage the competitiveness of existing market tariff propositions and limit engagement with low-carbon technologies such as heat pumps².

Ofgem should, instead, focus on the issues that will fundamentally shape the investment signals, market dynamics and consumer engagement needed to deliver an efficient energy market under a clean power system.

This entails developing a cost allocation regime that is appropriate for the evolving nature of the energy system, which means bringing down bills over time by allocating costs in such a way that drives consumer engagement with flexibility and improved customer outcomes. This is, in part, through ensuring network charging reflects consumers’ actual additional cost to the system, simultaneously enabling rewards for consumer behaviours that lower system costs and emissions.

Transparent consideration should also be given to other levers available to the Government and Ofgem to drive consumer engagement with energy. For example, modelling of the anticipated evolution of policy costs on the bill and the extent they will remain on metered consumption is critical to anticipating the impact of any changes to network charging. We encourage the production of a complete roadmap of current policy workstreams that could impact cost allocation.

This review is only part of what should be considered a critical mission led by the Government to ensure the public and businesses can see the energy transition delivering for them. This requires incentives to decarbonise and lower their energy bill, for example, by moving policy costs away from electricity, and to assess how targeted bill support can ensure vulnerable consumers are protected in the energy transition. If policy costs remain on electricity bills, it will be even more imperative that the outcomes of the cost allocation review support DESNZ’s work on enabling consumer flexibility, as high electricity levies will remain an issue even if network charging is reformed.

During the transition, consumer experiences are likely to become more diverse. At one end of the spectrum, we may see highly engaged households with full electrification actively participating in flexibility services. At the other end, consumers who can’t easily adopt new technologies, own a vehicle, or live in homes suitable for heat pump installation. The Government, supported by Ofgem, should focus on enabling a market for inclusive smart solutions so as many customers as practicable can benefit directly³.

Energy suppliers have a critical role in offering solutions that work for consumers around the charges they recover on behalf of the energy system. To deliver a fair system, Ofgem needs to propose options that facilitate the market to:

• improve consumers’ understanding of charges, knowing what behaviours can save them money;
• encourage consumers to behave in a manner that will save them money;
• ensure that vulnerable customers’ usage will lead to good outcomes, either saving them money or being protected from higher costs.

Ofgem should apply the following principles to determine how to take the review forward:

Charges should be cost reflective, rewarding behaviour that lowers system costs and emissions through a competitive and investable retail market.

• Improve transparency and certainty of upcoming and future costs for the entire market. Non-commodity cost uncertainty for suppliers adds additional costs to consumers through risk premia being added to contracts. Investment in energy assets is also dependent on clarity over long-term costs. Therefore, cost transparency and cost certainty should be a priority.
• Cost allocation should be as simple as is practicable; complexity should be avoided without strong justification and in full consideration of the important role of consumer engagement and behaviour change.
• Avoid options that would distort the market, reduce efficiency or damage investability and competition.
• Leave to the Government to consider any cost allocation options that require significant legislative change.

If you have any questions or would like to discuss this response in more detail, please do not hesitate to contact Energy UK.

1 Ofgem (2024) Standing charges: domestic retail options

2 Illustrative analysis by Frontier Economics presented at the Energy UK event How Clean Heat Can Bring Down Bills (18th September 2025) demonstrated how redistributing costs from the electricity standing charge to the unit rate could, all else equal, have an adverse impact on the financial incentives for many households to take up a heat pump.

3 Energy Systems Catapult (2025) Inclusive Smart Solutions