Energy UK response to Ofgem’s requirement to offer lower standing charge tariffs consultation

Executive Summary

Energy UK is opposed to Ofgem’s mandating low standing charge tariffs. While Ofgem has helpfully reflected important design risk mitigations since its original proposal, the current proposals will still unfairly expose energy suppliers to cost under recovery and could damage the progress made on building trust with consumers.¹ This proposal also sets a dangerous precedent of Ofgem deciding which tariffs are offered by suppliers, rather than allowing a competitive market to function effectively and efficiently.  

We think there should be greater caution after previous failed attempts by the regulator to dictate product offers, such as the ‘simplification’ rules in Ofgem’s Retail Market Review (RMR), which were found by the Competition and Markets Authority in 2016 to have an adverse effect on competition and, therefore, scope for customer engagement and savings.² Conversely, Ofgem’s initial concerns relating to the Ban on Acquisition tariffs have not materialised, with the regulator listening to the evidence and helping the market align to customer outcomes at the expense of cheaper, but unsustainable, headline tariffs. Ofgem should avoid repeating past mistakes and take an evidence-led, outcomes-focused approach to proposed interventions. 

As Ofgem states, these tariffs are not expected to address affordability concerns. However, this may be misunderstood by the public when the tariffs are communicated as a ‘reduction’ in part of the energy bill, with the corresponding increase in unit rates not comprehended, as seen with media coverage following the initial proposal announcement.³ It is unclear who these tariffs are intended to support and there is a risk that some consumers, including low-income and vulnerable customers, could be worse off because of taking up these mandated offers.  

Energy UK does not think it is Ofgem’s role, as an economic regulator, to reject the principle of competition without clear basis. We reject the premise that there are not low standing charge tariffs available, and that there is any evidence of pent-up demand for these tariffs that energy suppliers are not providing.⁴ Given that there are already low and zero standing charge tariffs on the market, Ofgem should avoid infringing on existing commercial offerings, which merely risks damaging the case for investing in the energy retail sector. 

Ofgem’s supporting evidence is research on consumers’ views and attitudes towards energy cost allocation, which suggested a majority of consumers think standing charges are unfair. However, the research also found that there is “no clear consensus on standing charges”.⁵ The mixed evidence does not provide any indication of significant future switching behaviour to low standing charge tariffs. Ofgem, therefore, appears to be introducing a licence change, which will place further burden on suppliers and risks confusing customers, simply in order to test a hypothesis.  

Of course, Ofgem must seek to identify market failure. However, to maintain real retail competition, with investment in customer propositions, the obligation must be on a regulator to provide a credible case and value for such significant intervention. This is particularly the case for an intervention that could cause total market energy bills to increase, reduce incentives to adopt low-carbon technologies, and potentially requires hundreds of new tariff variations for all regions and payment types.^6,7  

The production of a highly limited impact assessment, and the lack of clarity surrounding the monitoring of metrics for success and failure, cause significant concern that there is little understanding of the likely outcomes. The Government’s Better Regulation Framework provides a model for interventions, which would help to avoid these issues.⁸ 

This proposal also risks conflicting with, and potentially undermining, Ofgem’s Cost Allocation Review, which seeks to reflect on the market dynamics that shape how an energy supplier approaches tariffs, including network costs, and could provide a far more robust evidence base for any future regulatory changes.⁹ Similarly, the Consumer Confidence programme, which Ofgem is set to consult on shortly, could be affected by determining a consumer preference for standing charge choice above all other outcomes before this work has kicked off.  

We encourage Ofgem to drop the proposed obligation on suppliers to offer low standing charge tariffs and instead focus on enabling a simple, comprehensible and accessible energy retail market that delivers for customers, supports investment and innovation, and helps deliver the clean power transition. 

If you would like to discuss this response with Energy UK or its members, please do get in touch.  

Ed Rees  

Head of Retail Policy 

ed.rees@energy-uk.org.uk