UK to look at introducing energy bills based on wealth
Energy regulator Ofgem has announced a major review into how costs are allocated across the energy system – including looking at a range of potential alternative pricing models for consumers.
As part of the review, stakeholders are being asked for their views on what a new pricing model might look like, which would be subject to future consultation.
“The energy system is changing, with maintenance investment and upgrades required. Renewables will help protect billpayers from volatile global fossil fuel prices by allowing us to generate homegrown energy and increase market stability,” Ofgem said in an accompanying statement
“Meanwhile, many domestic consumers have made it clear that they think the current system of a standing charge and a unit rate is unfair, though research indicates there is no consensus on a preferred alternative model.”
The regulator said it is only seeking views at this point and is not recommending any specific option. Some decisions, such as how costs are shared through bills or taxes, or who gets extra support, would ultimately be a government decision.
However, many choices are made jointly by the government and regulator, shaping what goes into energy bills and how costs are recovered, it said.
A change in charges
At present, wholesale costs, most policy costs and costs to balance the network are recovered from domestic consumers via volumetric charges. The majority of costs associated with investing in and maintaining the physical electricity network are recovered from consumers as a fixed cost, via the standing charge.
However, the review provides several examples of how this could change going forward. “For example, if a progressive approach was desired, then energy system fixed costs could be allocated and recovered (predistribution) based on a proxy for wealth,” it states.
It suggests an ‘income-based standing charge’ and a ‘wealth-based standing charge’. These could also be introduced alongside other charges, similar to other industries like mobile phones and broadband, it said.
“Alternative models to allocating and recovering costs already exist in other markets. For example, mobile and broadband telecoms predominantly operate on a single standing charge model, with a flat price per month with additional charges for extra use or features, like increased connection speed or using a mobile phone abroad,” it states.
“In rail transport, consumers face charges based on the time of their travel through peak and off-peak ticket pricing. Charges like Council Tax are levied on ‘wealth’, using a home’s value as shorthand for a household’s ability to pay. ”
Ofgem noted that all these options come with trade-offs and practical challenges when implementing, which it will need to consider as part of its assessment of options for what may be possible within the energy sector.
