Last week I wrote a post that looked at the effect of standing charges on consumer understanding of energy tariffs. Standing charges are set daily fees that consumers pay regardless of their actual energy usage. I argued that eliminating standing charges is the best possible way to simplify energy tariffs. This would make switching easier for consumers and would lead to a better deal for low-energy consumers. Today I will take a different approach to the issue and will focus on the inter-relation between energy efficiency and the standing charge. As far as I can tell this issue is too boring for any academic research to have been undertaken, so the statistics here are based on my own calculations from Ofgem data.
Energy efficiency, households and climate change
There is a growing understanding of the importance of energy efficiency at reducing energy demand and alleviating climate change. Reductions in demand, particularly at peak times, would reduce the amount of energy generated from fossil fuels such as coal and gas. In turn this would help to reduce carbon emissions into the atmosphere and reduce the rate of global warming. Both the UK government and intergovernmental organisations such as the IPCC have reinforced this by having a large role for energy efficiency in meeting climate change targets. Much energy efficiency policy is directed at households, through measures such as the Green Deal. It is important therefore that electricity markets and tariffs are optimised to reward energy efficiency as much as possible. Price reductions are one of the key driving factors behind consumers’ motivations to invest in energy efficiency measures. It is also important that new energy efficient homes have electricity tariffs available that are optimised for low electricity usage.
The impact of standing charges on energy efficiency
The standing charge stacks the decks against energy efficiency, meaning that reductions in energy demand result in a proportionally smaller reduction in energy usage. The graph above shows this relationship and demonstrates how significant the proportion of the standing charge is in some circumstances. Given the regressive nature of the standing charge, it’s effects are most significant for those in low energy usage households, often those on low incomes. If a low income household was to invest in energy efficiency and reduce their electricity usage by 30%, which is admittedly at the higher end of possible returns, the actual reduction in their bill would be closer to 15%. This has a number of effects. Firstly it means that consumers are not seeing the benefit of their energy efficiency measures in proportion to the reductions they are making. This may act as a disincentive to undertake significant energy efficiency measures. It may also work the other way and introduce an element of moral hazard, where consumers feel that increasing their energy usage will have a smaller effect on their actual bill. One suggestion for future research may be to survey consumers to determine how they see the relationship between standing charges and energy efficiency.
Conclusion: the case for abolition seems clear
Based on the arguments in this and the previous post it should be clear that the abolition of standing charges for residential electricity users should be a priority for OFGEM. It would improve consumer understanding, promote easier switching and promote energy efficiency. It would also provide a much needed energy cut for people on low incomes, with a truly progressive system of energy use introduced where bills are based on consumption. However, there are perhaps a couple of obstacles that stand in the way of this becoming a reality that would be useful to take into account. First is that there is likely to be significant resistance from the ‘big six’ suppliers, who have a fiduciary duty to try and keep standing charges, unit rates and consumption as high as possible. Second is that standing charges are a relatively dull topic, and one that it is unlikely that significant political support could rally around. This is a shame given that the recent retail market reforms have failed to simplify tariffs for consumers and because the landscape is very difficult for consumers to navigate without price comparison websites.