Harm of Standing Charges

Insulation doesn't pay? As energy savings get bigger, effect on bills gets smaller, so the work takes longer to pay for itself, and is harder to justify
photo: Wikimedia/ The EnergySmart Academy

Have you ever tried to save energy, only to discover it doesn't make much difference to your bills? It's one of the fundamental unfairnesses of the standing charge on your utility bills. The more energy you save, the less effect it has on your bills, thanks to the standing charge. It's a charge designed to make sure all accounts make profit, so low energy users don't become 'undesirable' customers. But it means that the owner of a mansion pays the same standing charges as a tenant in a bedsit who uses a fraction of the energy. But there's another problem...

The standing charge stands in the way of energy efficiency

Standing charges block energy efficiency by driving up payback time

UK homes are amongst the coldest and draughtiest in Europe. Governments have failed to deal with the 17% of the UK's carbon emissions Failure to reduce homes carbon emissions since 1990.
Residential sector emissions (red line) fell by only 19%, compared to 42% reductions achieved by the Commercial & Public sectors (orange line) during the same period.

UK Carbon Emissions by sector (in MtCO₂e) Your browser will not support this graphic. Try enabling Javascript. Source: GOV.UK
caused by heating poorly-insulated homes. They have failed to provide proper motivation for households to take energy efficiency seriously.

Energy upgrades can be very expensive, and long-term cost is a key factor in people's decisions ... how much money will it save? The answer is 'Not as much as you'd hoped', because the standing charge reduces the rewards of saving energy. The result is that it takes longer to pay for itself, so those big investment - in insulation, heat pumps, solar panels etc. - become harder to justify.

REVERSING the standing charge could STIMULATE INVESTMENT

If standing charge deters investment, could the situation be reversed to stimulate homes to invest in energy efficiency? Instead of a standing charge, could a standing credit be the answer?

Standing charges make UK more dependent on imported gas and help drive fuel poverty
The UK has the worst energy efficiency for housing in Europe. And now that North Sea Gas has virtually run out UK Oil and Gas about to run out
UK Gas reserves (in TWh) Your browser will not support this graphic. Try enabling Javascript. source: Gov.UK O&G production and reserves
UK gas reserves (proven and probable) fell to just 1938 TWh in 2021, enough to supply the UK for just two years. Exploration and drilling continues, depending on oil and gas prices, but most of the major oil companies have given up trying to find any new economically viable fields.

UK Oil reserves show a similar picture, as existing fields falter. Potential new deep water fields off Shetland (Rosebank and Cambo) are only viable with government subsidies and high oil prices. Most of the major oil and gas companies have now left the North Sea, but the rigs, wells and pipelines still all need to be decommissioned, at an estimated cost of £40 billion, paid by taxpayers. , households face inflated costs of imported fossil fuels to keep warm. Rishi Sunak's cash handouts as chancellor eased the pain in 2022, but they were unsustainable. The only way to get off gas is through insulation and heat pumps.
Image: Electric Shock

How it works:

the Standing Credit

Instead of a daily charge on your bill, you get a daily credit. But it isn't a free handout from the energy company. You get a free energy allowance, but each unit of gas/electricity also costs more, so the average household sees no difference. However, energy savers see big reductions in their bills, whilst those that burn more pay significantly more.

The idea originates from energy pressure group Fuel Poverty Action.

Example of how the standing credit works
A standing credit could ease fuel poverty and stimulate energy efficiency without affecting fuel companies’ bottom line – except by reducing fossil fuel sales. Windfall taxes and other subsidies can then target insulating rented sector homes:

The standing charge punishes people that don't use enough energy, especially those in the smallest poorest households. The owner of a mansion pays the same standing charges as a tenant in a bedsit who uses a fraction of the energy.
Image: Electric Shock

7 reasons to introduce the Standing Credit
(1) Targeted relief for fuel poverty without complicated handouts.
(2) Strong incentive for major energy upgrades without complicated grants.
(3) Shifts the energy cost burden to persistent high energy users. It targets wealthier owners of larger properties, most likely to be able to afford insulation and heat pumps that will bring their bills back down.
(4) Makes energy efficiency more affordable by reducing the payback period.
(5) Instantly stimulates fast energy reductions that the UK urgently needs.
(6) Building activity stimulates growth instead of inflation.
(7) Fall in demand lowers gas prices.


5 issues that a Standing Credit must address
(1) Vulnerable customers - some of the highest energy consuming households belong to 'vulnerable customers' often on low incomes. These could be elderly people that keep their homes unbearably hot, but can't control it because they have dementia, or individuals dependant on power-hungry medical machinery to keep them alive. Presumably these cases can be identified and their needs met with support channeled through relevant caring agencies.
(2) The standing charge guarantees that all customers generate a profit for energy suppliers. The standing credit would result in some customers paying nothing, which could make them unattractive to energy suppliers, leading to them being cut off. The solutions could include a new formula which continues to remunerate supply companies based on service levels, perhaps by reallocating the 'per unit supplied' income. Alternatively, unprofitable customers could be moved to a different income stream, which is levied from the total pool of 'profitable' customers. Energy companies could decide who they consider profitable or not.
(3) The Standing Credit provides a strong incentive for home owner-occupiers, but less so for landlords, leading to an unacceptable situation where tenants are vulnerable to higher energy bills. Solutions could include (a) a standing credit based on energy rating (subsidised by the landlord?), or (b) other measures to ensure that landlords face the penalties of energy inefficiency, not the tenants, such as the 'Warm rent' system used in Germany.
(4) Should the standing credit be one-size-fits-all, or tailored to the number of occupants or bedrooms? Should a terraced house divided into three flats each with their own energy accounts receive three standing credits when the HMO (house in multiple occupation) with one bill only gets the one standing credit to share amongst its tenants? A simple solution could be for the standing credit to be divided into bands based on property value, like the council tax.
(5) Standing credit needs some flexibility to adapt to whichever fuel customer uses to heat their home (ie gas, electricity, oil etc). Eg., customers won't switch to electric heat pumps if they can't bring their gas credit with them, or else they will lose out.