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British households could face different electricity rates based on their income, Ofgem’s chief executive has said, as the regulator seeks to ensure the cost of the transition to cleaner energy is shared fairly.
Jonathan Brearley, the regulator’s CEO, said on Tuesday that Ofgem would launch a review this summer into how electricity network and other costs including some renewable energy subsidies are charged on bills.
“Over the next few years, we do expect variable costs to come down, but the proportion of costs that are fixed will rise, which, if unchecked, could exacerbate inequalities that we see today,” Brearley said.
“So, in the summer, we are launching a wide-ranging examination of how we best allocate costs within the energy system from first principles. We will look at the best way to share out costs, including the incentives they put on consumers,” he added.
Speaking at an Ofgem event attended by energy industry leaders, he stressed the review was at an exploratory stage and any decision was a long way off.
“We want to at least ask the question — whether or not we can allocate costs more progressively,” he said, noting that any attempt to “do something related to income” would be logistically challenging.
His comments come as the industry and government grapple with the challenge of keeping energy bills down while fairly distributing the upfront costs of moving away from fossil fuels.
Household energy arrears hit a record high of almost £3bn at the end of last year, according to Ofgem, partly linked to the 2021-2022 energy crisis when bills soared because of gas market disruption as economies reopened after the pandemic and following Russia’s full scale invasion of Ukraine.
In the run-up to the general election last July, the Labour party promised to reduce annual household bills by £300 by 2030, although critics question whether that will be possible.
The price cap governing British energy bills has climbed from £1,568 per year in July 2024, when Labour won the general election, to £1,849 per year this month.
Brearley called for a more “enduring and strategic” approach to energy affordability.
Network costs are currently put into the standing charge, a fixed amount which households pay every day regardless of how much energy they use.
But Ofgem is concerned about the risk of higher standing charges in future, as network costs rise as a result of network owners recouping costs of massive investments required to carry electricity from wind and solar farms to homes and businesses.
“What [the review] will mean is looking at the bill and saying, are there ways in which we can attach the price customers pay for fixed costs to income,” Brearley said
Ofgem is consulting on separate proposals to require energy companies to offer some tariffs with low or no standing charges, following complaints from customers that the charges are unfair.
The government is also under pressure to move environmental levies off electricity bills altogether, potentially on to gas bills or into general taxation.
