Ofgem has been consulting on reducing the costs of standing charges on domestic energy tariffs and transferring them to the rates. This would benefit those who consume modest amounts of energy and in theory through behavioural change encourage homeowners to reduce their home energy consumption.
In theory we are supportive of this type of behaviour change, however we are objecting to this proposal because it makes the ‘Spark Gap‘ – the ratio of the electricity to gas prices which are already the worst in Europe even worse. The issue is that if you want to decarbonise your lifestyle the most obvious choices would be to buy and EV or a heat pump, increasing your electricity consumption significantly while reducing your gas and petrol consumption. Moving the standard charge costs to the rate (per kWh) would increase the costs of high electricity users with heat pumps and EVs and act as an economic disincentive to move away from the consumption of fossil fuels. A typical heat pump for example is 400% more efficient than a gas boiler, but electricity prices are 4 times those of gas, these cancel each other so the cost of running a heat pump is very similar to that of a gas boiler. In most European countries the electricity to gas price ratio is about 2.5 to 1, making running a heat pump is more than 35% cheaper, and providing an economic incentive to switch.
One of the biggest issues is that the vast majority of the ‘Policy Levies’ e.g. Warm Home Discount and solar FITs are funded by a levy on the electricity tariff and not on the gas tariff, a form of ‘inverse carbon tax’. The Department of Energy Security and Net Zero (DESNZ) has for a number of year suggested it is going to look at this but nothing has happened and the outcome of this Ofgem inspired consultation will only reduce economic incentives for homeowners to decarbonise further.
Our main response to the consultation is as follows:
We continue to object to this proposal to move standard charge costs onto the rate because it will have a negative impact on decarbonising domestic property and transport. Adopters of heat pumps and EVs are large consumers of electricity and small consumers or have no consumption of gas. The short term benefit of encouraging those through behavioural change to lower their electricity consumption will have a marginal impact on consumption compared with the 75%+ carbon emission reduction of someone switching to a heat pump or an EV. There is already a problem with the ‘Spark Gap’ in the UK: https://www.lowcarbonhub.org/p/spark-gap/ which is acting as a strong economic disincentive for homeowners to switch to low carbon heating and transport systems. These proposals will only make the ‘Spark Gap’ worse. We also object to the alternative proposals for a tiered block tariff for the same reasons, it penalises higher electricity users who have switched their heating and transport away from fossil fuels. We note from your analysis “Finally, allocating all costs to the electricity unit rate would benefit owners of solar panels but would increase the costs of running heat pumps and electric vehicles (EVs). This approach risks being detrimental to broader net zero ambitions. We have seen this challenge faced by other jurisdictions. For example, California did not include fixed charges on bills but has recently decided to introduce them due to concerns around ability to recover system costs and reduced incentives for the uptake of low carbon technologies“ that other jurisdictions have realised the point we have been trying to make but OFGEM seems to be heading in the opposite direction contrary to the UK’s climate commitments.
If you are trying to address fuel poverty then other grant and subsidy mechanisms along with a program of home insulation needs to be found.
This proposal will have a negative impact on the UK’s Net Zero aims, and requires an impact assessment under the Climate Change Act because of its negative potential in increasing carbon emissions and as we stated in the previous consultation this proposal needs coordination with DESNZ. We feel it particularly important that the UK addresses the ‘Spark Gap’ – our relatively high price of electricity compared with gas.