Decision on adjusting standing charges for prepayment customers

What changed

Ofgem decided in February 2024 to levelise standing charges between prepayment meter (PPM) and direct debit (DD) customers, effective from the Q2 2024 price cap period (April 2024). Prepayment customers have historically paid higher standing charges — the fixed daily amount charged regardless of consumption — because the costs of the prepayment infrastructure (meter maintenance, top-up networks, debt recovery) were allocated directly to the payment method that caused them. This decision removes that cost-reflectivity and spreads PPM-specific costs across both PPM and DD customer bases. Ofgem frames this as making payment methods "more equal or equitable" and explicitly acknowledges the trade-off: it is less cost-reflective.

A reconciliation mechanism accompanies the decision, ensuring that the redistribution is tracked and trued up between suppliers. Ofgem committed to reviewing the impact and operation of the levelisation before the end of the first year.

What this means in practice

For prepayment customers: standing charges fall. The exact reduction varies by region and meter type (single-rate vs multi-rate), but the principle is straightforward — the premium that PPM customers paid over DD customers on the standing charge element is eliminated or substantially narrowed. Ofgem's regional levelisation models (published alongside the decision) calculate the adjustments for each of the 14 GSP regions.

For direct debit customers: standing charges rise. The costs that were previously borne by PPM customers are now shared across the larger DD customer base. Because there are roughly three times as many DD customers as PPM customers, the per-customer increase for DD is smaller than the per-customer decrease for PPM — but it is a real cost increase for a group that did nothing to cause it.

For suppliers: the reconciliation mechanism adds operational complexity. Suppliers with disproportionate PPM customer bases (typically smaller suppliers and those serving more deprived areas) will be net recipients; those with predominantly DD customers will be net payers. This is a cross-subsidy administered through licence conditions, specifically the new Standard Licence Condition 28AD.

The economics: This decision explicitly abandons cost-reflectivity in favour of equity. The standing charge premium for PPM was not arbitrary — it reflected real costs. Prepayment meters are more expensive to maintain, the top-up infrastructure has costs, and debt management for PPM works differently (the meter itself is the debt recovery mechanism, which is why PPM customers cannot accumulate debt in the same way DD customers can). Levelising these costs means DD customers now pay for infrastructure they do not use.

The distributional argument is that PPM customers are disproportionately low-income and fuel-poor, so charging them more for a payment method they often did not choose (many are placed on PPM involuntarily following debt) is regressive. This is true as a description of the population. But the instrument is blunt: it benefits all PPM customers equally, including those who are not financially vulnerable, while increasing costs for all DD customers, including those on low incomes who happen to pay by direct debit.

The paused Phase 2: The August 2024 open letter reveals that Ofgem planned a second phase — levelising debt-related costs between Standard Credit (SC) and DD customers. This has been paused. The logic would have been the same: SC customers pay higher standing charges because they generate more debt costs, and Ofgem considered spreading those costs to DD customers too. The pause suggests either political resistance or recognition that the cumulative effect of multiple levelisation rounds on DD standing charges was becoming difficult to defend.

What happens next

Ofgem committed to a review of PPM/DD levelisation before the end of the first year of operation (i.e., by March 2025). That review should assess whether the redistribution achieved its equity objectives and whether the reconciliation mechanism is working cleanly between suppliers.

The paused Phase 2 (SC/DD levelisation) will resurface. Ofgem's open letter promised an update on wider debt policies in Autumn 2024. When it returns, the same dynamic applies: costs currently borne by the payment method that generates them would be spread to DD customers, further increasing DD standing charges.

This decision sits within a broader political context around standing charges. There is growing public and parliamentary pressure to reduce or abolish standing charges entirely, which would require either recovering fixed network costs through volumetric charges (penalising high users and undermining efficiency signals) or through general taxation (which has its own problems). Ofgem's levelisation is a partial step — it does not reduce total standing charges, it just moves them between customer groups.

The structural question remains: if the goal is to protect vulnerable consumers, is cross-subsidising within the bill the right instrument, or would targeted support through the welfare system be more efficient and better directed? Levelisation helps every PPM customer, regardless of need, and charges every DD customer, regardless of ability to pay. A means-tested intervention would do neither.