Richer UK households could pay more for their electricity, says regulator

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British households could face different electricity rates based on their income, the energy regulator’s boss has said, as the watchdog seeks to ensure the cost of the transition to cleaner power is shared fairly.

Jonathan Brearley, Ofgem chief executive, said on Tuesday the regulator would launch a review this summer into how electricity network and other costs including some renewable energy subsidies are charged on household 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.”

Speaking at an Ofgem event attended by energy industry leaders, Brearley stressed the review was at an exploratory stage and any decision was some 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 the government grapple with the challenge of keeping consumers’ 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.

This is partly linked to the 2021-2022 energy crisis, when consumers’ bills soared because of gas market disruption as economies reopened after the Covid pandemic and following Russia’s full scale invasion of Ukraine.

In the run-up to the general election last year, the Labour party promised to reduce annual household energy bills by £300 by 2030, although critics question whether that will be possible.

The UK energy price cap on bills has climbed from £1,568 per year in July 2024, when Labour won the election, to £1,849 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 the future, as network costs rise as a result of infrastructure 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 these levies are unfair.

The government is also under pressure to move environmental levies off electricity bills altogether. They could potentially move on to gas bills, or into general taxation.