Energy bills could fall for pre-payment meter users under new Ofgem standing charge plan

Households with prepayment meters could pay permanently lower energy bills, while other homes will pay more, according to new plans from regulator Ofgem.

It has drawn up plans to standardize fixed costs, the daily costs added to energy bills regardless of how much gas or electricity a home uses.

These plans would save customers with prepayment meters around £50 a year on energy bills, and those with standard credit meters £45, but would add £20 to customers with standard meters who pay by direct debit.

Typically, customers with prepayment meters pay more for energy to cover the additional costs of using their meters. This additional amount is paid via a higher fixed charge.

However, that changed in October 202 when the government equalized costs between different meter users as part of its Energy Price Guarantee.

That guarantee, which also limits energy bills to £3,000 a year, expires in April next year.

In response, Ofgem wants to devise a way to keep bills as low as possible after April 2024 for both prepayment and standard credit meter customers.

The regulator said it wanted to do this to help the “disabled, chronically ill and low-income” customers who have these meters in larger numbers.

Ofgem also pointed out that fixed costs have increased, by up to 60 percent in two years.

The average home now pays 53p per day in fixed charges for electricity, or £193.45 per year, while for gas the typical rate is 30p per day and £109.50 per year.

Don’t stand still: fixed costs have been rising steadily since 2021

Rising fixed costs are most detrimental to low-income households and vulnerable households.

This is because they are more likely to ‘ration or self-shut off’ their power supply, which could have ‘adverse effects on health and wellbeing’, Ofgem said in a consultation today.

Fiona Waters, spokesperson for campaign group Warm This Winter, said: ‘We welcome any measures that would make energy bills fairer and end the penalization of some of the poorest in society.

‘The challenge for prepayment meters is that historically unscrupulous energy companies have forcibly installed these meters in vulnerable homes, a process that we still believe should be banned.

“If someone can’t afford to charge the meter, everything clicks off, regardless of whether they’re old, sick or have a newborn.

‘Reducing fixed costs for prepayment meter customers would be a step in the right direction, but it must be done in the fairest way possible and also extend to ending a similar penalty for standard credit customers. Nor is this a substitute for a fundamental reform of the entire system of fixed charges.’

How else could fixed costs change?

Energy regulator Ofgem said earlier this month it would consider alternatives to the fixed charges, and called for suggestions from the industry and the public on how the system could change.

Energy experts have made three suggestions to This is Money about how they would like to see fixed costs change.

These include:

1. No fixed costs for customers with prepayment meters

National energy action director of policy and advocacy Peter Smith said: ‘How can it be right that someone who cannot afford energy for their home still pays a daily allowance equal to or more than someone in a country house? A review of the system should have been done much earlier.’

2. Make it fair for people in different areas

Fixed costs vary depending on where you are in the country, with some places paying £86 per year more than others – a third extra.

The cheapest fixed electricity and gas rates for these rates can be found in London, where homes pay around £276 per year, while Merseyside, North Wales and parts of Cheshire pay the most, at £362.

NEA head of Wales Ben Saltmarsh said: ‘As well as general increases in fixed costs, where you live also has a big impact on how much you pay. People in North Wales and Mersey pay a third more per year than Londoners.’

3. End unfair accusations, but protect the vulnerable

Non-fixed rates can be attractive to lower-income households because they can gain some control over their energy bills by reducing energy consumption.

But that brings complications for lower income groups that do require higher energy consumption, such as the elderly and people with medical needs.

Warm This Winter’s Waters said: ‘We welcome any move that will reduce energy bills for ordinary people and the fixed charges are unfair because people have to pay even if they don’t use energy.

‘We know it is a complex issue, so any changes must be made in a way that does not disadvantage those who rely on huge amounts of energy for medical reasons and other vulnerable groups.’