We pay twice for our electricity and gas. First, through a standing charge just for being connected before a single electron or molecule has entered our home. Secondly, for each unit of power we use as measured (approximately for gas) by the meters under the stairs. In April, both these elements will rise in England, Wales, and Scotland in line with the increases in the price cap announced by Ofgem, the regulator.
As the table shows, the cost of consuming a unit of electricity — for example, to boil a kettle of water for our morning tea — will rise by just over a third, per kWh. But the standing charge to have electricity in the house at all will leap by 82 per cent.
Meanwhile for gas, the cost of having the fuel piped to our home will rise by 4 per cent — less than inflation — but the unit price will rocket, by 81 per cent.
These are the default tariff cap prices, including VAT, announced by Ofgem on February 3. They apply in Great Britain to bills settled by monthly direct debit — the cheapest way to pay. They are the maximum that can be charged by the 20 or so remaining energy suppliers — 29 have gone bust or into administration since January 2021. The tariff caps do not apply in Northern Ireland where there is a different regulator and no cap.
Around 22mn of us pay the capped rates and the rest will follow as their fixed deals run out. But some people pay even more than the rates in the table. The 4.5mn homes which have a prepayment meter pay a small premium of around 2 per cent overall (typically an extra £47 a year), according to Ofgem. People who stick with the old-fashioned method of paying only for what they have actually used each quarter, suffer an even bigger premium — typically 7 per cent or £130 a year.
The complications do not end there. Great Britain is divided into 14 energy regions and each has its own prices. I calculate, using Ofgem data, that unit costs can be above or below the mean by up to 5 per cent and standing charges as much as 29 per cent. The Ofgem document setting out the new default tariffs has 252 boxes to hold them all. It keeps the Ofgem boffins happy. But it makes life complicated for the rest of us.
Worst of all is the standing charge. Traditionally, this covers the costs of supplying the electricity or gas to our home, maintaining supply lines and taking meter readings. But it has been hijacked for other purposes.
The 82 per cent rise in the electricity standing charge now includes half the cost of reimbursing big firms which took over the nearly 3mn customers of 27 smaller suppliers that went bust in 2021. Ofgem puts that at £68, which means £34 on the electricity standing charge. It also includes a share of the “policy costs” — the government-imposed charges to pay for a greener future.
Worse is to come. From April 2023 the £40 a year repayment of the £200 discount which the chancellor is lending every electricity bill payer, will be added, the Treasury says, to the electricity standing charge. I estimate that this would raise it by nearly a quarter.
For some low users the standing charge in April will be a quarter of their electricity bill. They can’t reduce that by putting on an extra jumper or turning down the thermostat. That alone would be argument enough to scrap it. It’s an additional burden on the poor.
But there is another good reason to bin the standing charge — and one that affects almost all of us.
Competition works when it is simple. I can drive from one petrol station to the next to see which has the cheapest fuel. There is even an app to find the lowest cost which claims it can save me £225 a year.
A typical litre of petrol costs 146.9p. But imagine if there was one price on the pumps — the unit cost — and another fixed charge per visit added when we pay to cover overheads of rent, delivery and wages. The big sign might say 124.9p a litre plus £10.94 COB (cost of business). Other garages might choose to have a higher rate per litre but a lower COB.
The cheapest would depend on how empty your tank is and, over the year, whether you drive well above the average 6,000 miles annually or not.
And suppose the forecourt signs were scrapped and you just got an email saying that your annual costs were expected to be £802 but you could save money by going to the cut-price garage down the road which will fix at £789 for a year? That is how domestic energy is marketed.
Fair competition can only be achieved by scrapping the standing charge so we can compare the costs including overheads. If British Gas charges 34.15p a kWh inclusive for electricity but EDF charges 32.95p, I’ll go with EDF thanks. And if that rises next month, I’ll move to Ovo which has cut its price to 33.18p.
In the current price surge, almost everyone in Britain now pays a price fixed by the regulator. But as and when prices settle and competition returns, we need a fair market for consumers. Baked beans, petrol, energy. Simple pricing means effective competition and an end to energy companies’ grand complexification.
Paul Lewis presents ‘Money Box’ on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney