For a government seeking to reduce the cost of essentials, cutting the standing charge in energy bills would be an easy win, almost a no-brainer in fact. The standing charge disproportionately affects low income households because they tend to consume the least energy so it forms a larger proportion of their bills.
This payment, a form of rent, takes up the first £320 p.a. (excl. VAT) that consumers have to spend on energy. Yet it should be about £85 p.a. as that is the actual cost of serving each customer (doing things like providing a meter), as opposed to the cost of supplying them with energy, which would be expected to determine the price per unit of energy (the unit rate).
The price cap was introduced in 2019 because energy tariffs were known to be excessive. In setting the cap the regulator Ofgem reduced the unit rate but inexplicably left the standing charge at the prevailing market level. Since then it has exacerbated the problem by adding network costs to the standing charge even though it had previously said the bulk of them should be included in the unit rate.
Ofgem was taking its lead from Tory energy minister Greg Clark, who had said in 2018 that there should be no “free riders”. What he meant was that those who had reduced their energy consumption by installing solar panels should not contribute any less to network costs so these should be recovered through the standing charge rather than the unit rate.
In November 2023 Ofgem finally acknowledged a groundswell of public discontent about the standing charge in the price cap and consulted on reducing it. Over 30,000 people responded to the consultation, which Ofgem rightly described as “extraordinary”, and they overwhelmingly called for Ofgem to reduce standing charges.
Yet Ofgem’s disappointing response to this was merely to announce another consultation, asking the public to tell it what the level of the standing charge should be. In July 2025 the Living Standards Coalition of Labour MPs led by Dr. Jeevun Sandher urged Energy Secretary Ed Miliband to reduce the standing charge in order to help low income households but Ofgem then predictably announced – you’ve guessed it, another review and consultation.
The publicity about reducing standing charges means everyone thinks the problem has been resolved but in fact nothing has changed.
Ofgem has defended high standing charges on the basis that some people have to use large amounts of energy for medical or health reasons so need unit rates to be low. But they are a very small proportion of all consumers and it wouldn’t be impossible to either design a price cap with high standing charges and low unit rates just for them or negotiate a rebate or additional subsidy for them.
As well as impoverishing the poorest consumers overly high standing charges have had a number of other distorting effects. Firstly, they mean that the price per unit of energy has to be capped at a lower level to afford the companies a reasonable rate of return. That raises demand for energy, which increases carbon emissions, reduces the U.K.’s energy security and increases the investment needed in generation and network capacity.
High standing charges are also likely to have contributed to the collapse of many suppliers during the energy crisis. They encouraged the growth of companies that were more focused on gaining customers in order to capture these rent payments than on managing their energy purchases and so were caught out when wholesale prices increased.
Now, energy companies are burdened with vast levels of consumer debt. This is particularly among poorer customers so it seems likely that excessive standing charges are contributing to that too.
The problem calls for energy ministers to get to grips with the underlying issues for themselves rather than relying on Ofgem but correspondence from ministers on energy matters generally appears just to parrot the Ofgem lines. If anything alternative arguments may be even less likely to be heard following the appointment of the former chief executive of Ofgem as permanent secretary at the Department for Energy Security and Net Zero in March.
One of Andy Burnham’s first actions as prime minister was to announce that from October VAT will be removed from electricity bills to help ease cost of living pressures. The move will save households an average of £45 a year and cost £850m. in 2026-27. However, it’s a regressive measure that will mainly subsidise the wealthy consumers who consume the most electricity. Instructing Ofgem to cut standing charges for gas and electricity to the true cost level would cost the government nothing and put £235 a year in households’ pockets.
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All blog posts represent the views of the author alone and not necessarily those of Mainstream.
David Osmon was formerly a senior economist at Ofgem. He was the first to highlight the problem of high energy standing charges, which came to public attention when Fuel Poverty Action Group featured a paper he had written. Following that he also worked with National Energy Action on this issue.
