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Understanding Standing Charges on Your Energy Bill

Updated: Jun 28, 2023

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Do you know why your energy bill includes a standing charge? Standing charges are a fixed daily fee included in your bill, regardless of your energy usage. They cover the non-energy costs that energy suppliers have to pay on behalf of customers, such as maintaining and upgrading the energy network infrastructure and processing meter readings.

In addition, standing charges include the labour and operational costs of the supplier, which may increase due to several economic factors such as inflation and higher maintenance costs. Standing charges are applied to both electricity and gas tariffs and may vary depending on the region of the country and the consumption band your business falls into.

Understanding Standing Charges: Why Are Standing Charges Increasing on Your Energy Bill?

Network Charging Reforms

The way we pay for using the energy network infrastructure has been undergoing reforms over the past several years. Recent industry changes have led to a shift from variable to fixed costs, with a portion of costs that were once included in unit rates now collected via standing charges on energy bills. These changes aim to promote fairness and ensure that all customers contribute to network costs in a proportional manner with Ofgem's new fixed charging bands.

Some of the main changes that these charging reforms bring include:

  • Moving a portion of costs from variable charges to fixed charges.

  • Collecting fixed charges via standing charges on energy bills.

  • Ensuring more equitable contributions to the costs of using the energy network.

As a result of these reforms, standing charges are increasing for many customers. However, it's important to note that these changes are designed to make the energy market more transparent and fair for all customers.

Distribution Network Charges

One recent change that is increasing standing charges for many customers is the shifting of distribution network residual charges from variable to fixed costs. From April 2022, Ofgem began phasing in this change, which aims to ensure that all customers contribute to network costs in a fair and proportional manner.

Distribution network charges cover the costs of carrying electricity from the transmission grid to your business supply point. Previously, this portion of the network costs was included in unit rates. However, under the new system, Ofgem has decided that distribution network residual charges should be moved to a fixed cost and collected via standing charges.

This means that businesses are now seeing an increase in their standing charges on their energy bills. However, it's important to note that this change is part of a broader effort to reform the energy market and ensure that all customers pay their fair share of network costs.

Transmission Network Charges

Another important change impacting standing charges is the shift of transmission network charges to a fixed cost. These charges cover the costs of maintaining and expanding the high voltage network infrastructure and took effect from April 2023.

This decision by Ofgem is driven by the regulator's commitment to fairness. Under the previous system, these charges were calculated based on National Grid confirming the three half-hourly periods with the highest demand across the winter months. As a result, some businesses were able to predict these days in advance and avoid a large portion of these charges, leading to an inequitable distribution of costs.

With the move to a fixed cost, all businesses will contribute to the costs of the high voltage network in a fair and proportional manner. While this change may result in an increase in standing charges for some customers, it's important to remember that it's part of a broader effort to ensure that all businesses pay their fair share of the network costs.

Balancing system costs and the Move to Fixed Charges

Suppliers pay balancing system charges, which are the costs the system operator (National Grid) incurs with the day-to-day operation of balancing the grid to match energy supply and demand. Under the existing system, these balancing charges are variable and can be volatile, particularly at times when it's challenging to balance the amount of energy needed with that being generated.

However, from April 2023, Ofgem has decided that these costs should be moved to a fixed charge. Additionally, the regulator has decided that larger generators will no longer be required to pay these balancing charges. This means that these costs will be charged solely to end consumers, including businesses, from April 2023.

These changes are part of Ofgem's broader efforts to make energy costs fairer and more transparent for all customers. While businesses may experience an increase in their standing charges as a result of this change, the move to a fixed cost ensures that balancing system costs are distributed in a more predictable and equitable manner.

Inflation, labour and increased material costs

Network costs have been increasing due to the urgent need to upgrade and expand the energy infrastructure in order to support the UK's net-zero targets. However, this has been compounded in recent months by inflationary pressures and rising costs for materials and wages.

These factors are contributing to an increase in network charges, which are being passed on to businesses and customers in the form of higher standing charges on energy bills. While these price increases may be frustrating for some businesses, it's important to remember that they are necessary in order to support the transition to a cleaner, more sustainable energy system.

In the long term, these investments in energy infrastructure will enable the UK to meet its climate goals and ensure that energy costs remain stable over time. However, in the short term, businesses should be prepared for higher standing charges as a result of the inflation, labour, and increased material costs that are currently driving up network charges.

Understanding standing charges is essential for businesses that want to manage their energy costs effectively. As we've seen, standing charges are a fixed daily fee included in your bill that covers the non-energy costs that energy suppliers have to pay on behalf of customers. Lately, standing charges have been increasing due to network charging reforms, changes in distribution network charges, transmission network charges, balancing system costs and inflationary pressures. However, these changes are designed to make energy costs more transparent and fair for all customers, and is necessary to support the country’s efforts to reach net-zero targets.

If you're a business looking for ways to save on your next energy contract and manage your energy costs more effectively, don't hesitate to get in touch with us for a free quote today.


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