Standing charges are rising – and more
Among one of the most widely anticipated announcements coming in the next few weeks, along with inflation statistics and interest rates is Ofgem’s announcement on the energy price cap.
This will be the amount that domestic customers pay until the end of the year and it’s widely expected to be a reduction of up to 7% which would reflect the drop in wholesale energy prices – which is the amount the supplier pays for the energy it sells to customers.
But as there will be a lot of articles and blogs about the reduction, it’s a good time to reiterate some misconceptions for directors and business owners about what could happen to their energy bills between now and December 31st.
There’s no business energy price cap
That’s right. There is no price cap on the amount that businesses pay for their energy use.
Business energy rates have never been capped. If you have a non-domestic energy contract then your bills will not be affected, even if you work from home.
The only support available for businesses is with the Energy Bills Discount Scheme that was launched on April 1st 2023. It replaced the Energy Bill Relief Scheme but was not as generous.
It offers discounted unit rates on fixed-price contracts signed on or after December 1st 2021 as well as deemed or out-of-contract rates.
The discount available depends on how much higher than the minimum threshold rates the ones you are paying are, and it is only applied when the wholesale part of the unit rate is higher than the official government threshold rate of 10.7p per kWh of gas and 30.2p per kWh of electricity.
Even then, business users may not get the full discount if the rate reaches the maximum for that fuel before it can be fully applied.
For example, if the wholesale part of your unit rate is 31.2p per kWh hour then you’ll only get a 1p discount as your rate will have reached the threshold unit rate before the full 2p discount can be applied.
But if the wholesale part of the unit rate is 32.2p per kWh or more, then the full 2p discount is applied.
We’ve also saved the best detail until last – similar to the Energy Bill Relief Scheme, users are not eligible for a discount if the rates being paid are below the minimum threshold and for a variety of factors – since the scheme began no user has had the discount!
Energy rates are capped, not bills
The main thing to remember with the domestic energy discount is that it’s the unit rates for electricity and gas that are capped, annual bills aren’t.
The main announcements will be that the price cap for domestic users will be reduced from £2,074 a year to £1,923 – a reduction of £151.
This figure is based upon the average usage of a household paying by direct debit – a customer that uses more than the average amount or pays their bill in a different way will pay more than this.
Standing charges have increased – and there’s a reason
While the unit rates may have been cut slightly by the new price cap, the standing charges have slightly increased.
A standing charge is the fixed daily rate that all domestic and commercial energy users have to pay regardless of how much energy is being consumed and used. The energy companies say that the standing charge is used to cover all the costs associated with keeping a business or property connected to the energy network and running.
These costs include service administration fees, network maintenance and the cost of metre reading visits. The costs of fitting cables and building pylons is also covered as are recovering unpaid energy bills and making payments as the supplier of last resort when an energy supplier goes out of business and customers are moved to another supplier.
The current standing charges for businesses are:-
|Electricity daily standing charge
|Gas daily standing charge
Targeted charging review – why your standing charge has increased
In 2016, Ofgem declared that it was no longer a requirement for standing charges to be applied to energy tariffs but there are very few “no standing charge” tariffs available.
In an attempt to level the playing field, Ofgem introduced an initiative called the Targeted Charging Review (TCR) with the aim of modernising the electricity network and equalising the transmission (Transmission Network Use of System or TNUoS) and distribution (Distribution Use of System or DUoS) charges across customers.
TNUos covers building and maintaining transmission infrastructure like pylons while DUos covers the costs of building and maintaining local distribution networks to businesses such as substations.
These charges used to be included as part of the unit rate but some changes in generation and consumption (solar panels and turbines for example) have seen more businesses become less reliant on the grid with a result that fewer were contributing to the cost of these networks meaning that those that were had to pay more to make up the shortfall.
Ofgem decided that the best way to make sure more businesses contributed was to apply these fees to the standard charge instead.
Each business in the UK was allocated a TCR Band by their local distribution network with the DUoS element taking effect on April 1st 2022 followed by the TNUoS element on April 1st 2023.
Bands are allocated on metre size, not consumption. So if a business uses a relatively low amount of energy but has a half-hourly metre, as most high consuming businesses do, then they will be in a higher TCR band.
The upshot is that a company which used to be paying an average standing charge of £1 or £2 a day is now paying close to £10.
So the Energy Bills Discount Scheme has proved ineffectual so far because nobody’s bill got high enough to trigger the discount – but there’s no guarantee this situation will continue.
In fact, with winter arriving in only ten weeks, a colder snap could see business energy bills rocket, providing another headache for business owners and directors who are already seeing their finances stretched to breaking point.
This is why it’s imperative to get some impartial personal advice on what they can do to protect their company right now before any bumper bills start to arrive.
We offer a free initial consultation at a convenient time for directors to discuss the main issues facing them and then what they can do about them.
Administration or a CVA might be the perfect solution or if the obstacles are too great then a quick and efficient liquidation to allow owners to move onto their next venture and possibly launch it before 2024 arrives.
No matter what the answer to your problems – together we’ll find the answers.