Energy system cost allocation and recovery review

We are seeking views on whether there are fairer and more efficient ways of how we allocate and can recover energy system costs. As we transition to a cleaner and more secure energy system, the make-up of energy system costs are changing. We need to be able to share costs for a smarter and more efficient energy system. New approaches could offer better protections for consumers, while supporting decarbonisation and growth. ## Who should respond We would like views from people and organisations within the energy sector. We also welcome responses from: * domestic consumers * non-domestic consumers * consumer groups * charities * academia ## Background Great Britain (England, Scotland and Wales) is transitioning to a cleaner, more secure and resilient energy system. As we reduce reliance on fossil fuels and invest to upgrade and maintain our infrastructure, the structure of energy system costs will change. At the same time, new technologies and uses are changing how and when consumers use energy. These changes raise questions about how the energy system should be paid for by consumers. This review looks at how we could recover costs from consumers in ways that: * are fairer and more efficient * support net zero * support economic growth ## Before you start Read the Energy system cost allocation and recovery review document. You'll find it in the 'Related' section on this page. Please refer to this document when giving us your views. --- Call for input Energy System Cost Allocation and Recovery Review Publication date: 30/07/2025 Response deadline: 24/09/2025 Team: Cost Allocation and Recovery Review Team Telephone: 020 7901 7295 Email: costreview@ofgem.gov.uk As we invest in the energy system transition, ensure a more resilient system and support electrification of the wider economy, the nature of the system’s costs are changing. More of the costs that make up the bill will be ‘upfront’ capital costs, rather than ‘ongoing’ operating costs. That is why we believe it’s the right time to look at the principles of how we allocate and recover this evolving mix of costs in the system to test whether there are fairer or more efficient ways to do it. With these system costs, some are majority owned by government, such as policy costs. Whereas others are majority owned by Ofgem, like network costs. This call for input aims to set out the nature of the cost allocation and recovery ‘issue’, specifically in the context of how these system costs can be recovered from consumers. We explore different thematic options for how this can be approached. We then discuss how we can assess the options, particularly balancing complex trade-offs between considerations such as efficiency, fairness, practicality, net zero and economic growth. We are seeking feedback and input from a wide range of stakeholders to help shape our considerations and policy development. OFG1164 Call for input - Energy System Cost Allocation and Recovery Review © Crown copyright 2024 The text of this document may be reproduced (excluding logos) under and in accordance with the terms of the Open Government Licence. Without prejudice to the generality of the terms of the Open Government Licence the material that is reproduced must be acknowledged as Crown copyright and the document title of this document must be specified in that acknowledgement. Any enquiries related to the text of this publication should be sent to Ofgem at: 10 South Colonnade, Canary Wharf, London, E14 4PU. This publication is available at www.ofgem.gov.uk. Any enquiries regarding the use and re-use of this information resource should be sent to: psi@nationalarchives.gsi.gov.uk 2 Call for input – Energy System Cost Allocation and Recovery Review Contents Energy System Cost Allocation and Recovery Review ............................. 1 Foreword ................................................................................................ 5 1. Introduction and context ................................................................... 6 Why are we launching this review? ........................................................ 6 Related policy areas and themes ......................................................... 12 Responding to this call for input .......................................................... 13 Your feedback .................................................................................. 14 2. Consumer research and international examples ............................... 15 Domestic consumer insights ............................................................... 15 Omnibus survey ........................................................................... 15 Domestic consumer deliberative research ......................................... 16 Cost allocation online experiment .................................................... 17 Further research ........................................................................... 18 International examples ...................................................................... 18 Sweden ...................................................................................... 19 California .................................................................................... 20 Australia ..................................................................................... 21 3. Options ............................................................................................ 23 Options to recover energy system costs from domestic consumers ........... 23 Options to recover energy system costs from non-domestic consumers ..... 25 Options to amend the split of energy system costs recovered from the domestic and non-domestic sectors ..................................................... 27 Key issues and trade-offs ................................................................... 27 Amount of energy used ................................................................. 28 Reduced levels or removal of standing charges .................................. 28 Block tariffs ................................................................................. 29 Time of use ................................................................................. 31 Location of use ............................................................................. 32 Ability to pay-focused options ......................................................... 33 4. Assessment framework .................................................................... 35 Proposed assessment criteria .............................................................. 35 Using the assessment framework to analyse options............................... 37 Areas of analysis and data sources .................................................. 37 Key trade-offs and reaching an overall assessment ................................ 41 5. Consultation questions and next steps ............................................. 44 Consultation questions....................................................................... 44 Next steps ....................................................................................... 45 3 Call for input – Energy System Cost Allocation and Recovery Review Annex 1 - Current approach to recovering energy system costs from GB consumers ............................................................................................ 46 What are the costs categories? ........................................................... 46 How do they translate to consumer bills? .......................................... 47 Wholesale costs ................................................................................ 48 What are these costs? ................................................................... 48 How are these costs allocated and recovered? ................................... 49 How do we expect these costs to evolve over time during the energy transition? ................................................................................... 50 Network costs – Physical infrastructure ................................................ 50 What are these costs? ................................................................... 50 How are these costs allocated and recovered? ................................... 50 Regional variation ......................................................................... 52 How do we expect these costs to evolve over time during the energy transition? ................................................................................... 52 Network costs – Balancing the system .................................................. 53 What are these costs? ................................................................... 53 How are these costs allocated and recovered? ................................... 54 How do we expect these costs to evolve over time during the energy transition? ................................................................................... 54 Policy costs ...................................................................................... 54 What are these costs? ................................................................... 54 How are these costs allocated and recovered? ................................... 55 How do we expect these costs to evolve over time during the energy transition? ................................................................................... 56 Supplier operating costs and margin .................................................... 56 What are these costs? ................................................................... 56 How are these costs allocated and recovered? ................................... 57 How do we expect these costs to evolve over time during the energy transition? ................................................................................... 57 Annex 2 – Domestic consumer insights ................................................. 58 Omnibus survey ............................................................................... 58 Domestic consumer deliberative research ............................................. 58 Cost Allocation Online Experiment ....................................................... 59 4 Call for input – Energy System Cost Allocation and Recovery Review Foreword I speak to energy customers regularly, and I know that it remains extremely hard for many families and businesses to afford the energy they need. Though prices have come down from their highs during the gas crisis, they remain elevated and volatile. In my view, this makes the case for changing our energy system for good - by diversifying our energy mix to provide a cleaner, more secure and resilient energy system - as strong as ever. As we make this transition, while we expect wholesale costs to come down, infrastructure costs will rise. Without change to how these costs are recovered, this could exacerbate inequalities that we see today. We need a more enduring and strategic approach to standing charges and affordability, principally about how we allocate energy system costs in the best possible way. That is why we are launching this call for input as the first step in our Cost Allocation and Recovery Review, looking at the costs in the energy system and how they are allocated to consumers’ bills from first principles. We have heard loud and clear through previous consultations that many people feel current tariff options do not reflect how they actually use energy. We are already consulting on options to introduce more choice on standing charges, and in this review, we are looking at the underlying system cost allocation and recovery rules which ultimately flow down to consumer bills. We want an open and honest conversation, seeking views about how costs are currently distributed across the energy system, and whether alternative models for recovering those costs could deliver better outcomes for consumers. This is aimed at creating a better approach to consumer bills that keeps up with changes in the energy system. Our work will also include looking at how we can ensure that those who are on the lowest incomes and that are struggling most are able to adapt to the system that we have. The changes we are making to our energy system involve trade-offs which will not be easy. Inevitably there will be operational challenges that we must consider before any final decision can be made, and we will work closely with the government on the input we receive to help shape future proposals for change. However, the cause is momentous: to deliver the modern, secure, and sustainable energy system that will better protect energy customers. Jonathan Brearley Ofgem Chief Executive Officer (CEO) 5 Call for input – Energy System Cost Allocation and Recovery Review 1. Introduction and context Why are we launching this review? 1.1 The energy system in Great Britain (GB) is changing, with maintenance investment and upgrades required to drive this transformation. To reduce our reliance on international energy markets, protect consumers from volatile energy prices and bills in future, and reduce the UK’s contribution to greenhouse gas emissions, GB is transitioning away from an energy system that draws heavily on fossil fuels, such as coal and natural gas, to cleaner and more secure renewable energy sources like wind and solar. This investment in energy infrastructure will support a more resilient and well-maintained system and electrification of the wider economy. 1.2 We expect the structure of energy system costs to change as we invest in our system at pace to generate more clean power, boost energy security and resilience and support electrification of the wider economy. Fossil fuel-generated electricity typically has high ongoing costs, as each unit of electricity needs fossil fuel to be bought and burnt to generate power. Renewable electricity generation tends to have lower ongoing costs, as fuel doesn’t need to be purchased, but renewable technologies tend to need more up-front investment. This transition will also require more investment in our energy network infrastructure if we are to meet our energy transition commitments, improve energy security and resilience, and maintain the system. For example, by upgrading the pipes and wires that will deliver energy to homes and businesses. We estimate that as much as £80 billion of investment in the electricity transmission network will be required out to 2031 to maintain and enhance energy security while enabling the transmission of more clean energy from renewable sources. 1.3 Some of these capital (or investment) costs are currently collected through the standing charge, which includes electricity network charges. Others, like renewable energy investment support schemes (for example, Contracts for Difference or CfDs), and gas network charges, are recouped through the unit rate. There are also specific government policies, funded by energy bill payers, to support delivery of the energy system of the future, for example to help people improve the energy efficiency of their homes, to provide affordability support for those on means-tested benefits, or discounts for certain businesses in the interests of driving growth. The costs of these schemes are generally allocated based on specific targets and obligations set on energy suppliers. 6 Call for input – Energy System Cost Allocation and Recovery Review 1.4 In return for our energy bill, we get a reliable energy system where we can switch the lights or heating on when we want. The costs of this need to be recovered. 1.5 Under existing arrangements, energy costs are paid for by users and consumers through their energy bills, with separate standalone bills for electricity and gas. These bills need to cover the costs of all the energy, infrastructure and activities that are required to deliver gas and electricity to consumers, which are then charged to both domestic and non-domestic consumers. 1.6 As the make-up of the energy system changes, and without further intervention, some areas where costs are expected to increase over time, such as electricity network costs, would drive an increase to standing charges in future. Although other parts of the bill, particularly wholesale costs, are likely to decline, these are recovered through the unit rate, not the standing charge. We have heard loud and clear the messages from many consumers that high standing charges, daily charges that apply regardless of how much energy a customer actually uses, are unpopular and perceived as unfair. This is against the background of many GB consumers facing affordability challenges, including in relation to their energy bills. Taking together the changes in the make-up of the energy system and these consumer views and wider context, we think now is the right time to review how the transition to a greener and more secure energy system should be paid for by consumers. This should reflect that energy is an essential service central to our lives and crucial to our economy. 1.7 We are also seeing a shift in the way consumers use energy. Historically consumers tended to use energy in quite a predictable way, whereas we are starting to see consumers use new technologies to generate their own energy (for example, via solar panels). Some consumers are automatically shifting their energy use through time, for example, using smart devices in their homes. Others are increasing their demand for electricity by shifting to electric vehicles (EVs) and heat pumps. These changes in technology and behaviour could offer the potential to create more efficient charging arrangements that create stronger incentives to reduce peak demand and waste less energy, which could potentially reduce costs for everyone over time. This creates an opportunity for consumer-led flexibility to play a critical role in delivering an efficient, low-carbon system. However, these new technologies can also potentially lead to circumstances where those that have them could avoid paying for some energy system costs, which would then need to be paid for by other consumers. 7 Call for input – Energy System Cost Allocation and Recovery Review 1.8 Consistent with our statutory duties, our aim is for, but not limited to, the cost of providing energy to be allocated and recovered efficiently and in a way that protects consumers, whilst supporting decarbonisation and economic growth. We've launched this ‘Energy System Cost Allocation and Recovery Review’ to ensure we have a robust understanding of the changing nature of costs that will make up future energy bills, how those costs are currently recovered from consumers, and whether different approaches are possible that might better protect energy consumers during the transition to a greener and more secure energy system, while supporting economic growth. 1.9 We are open to considering a wide range of different approaches for allocating and recovering costs. This includes consideration of how different approaches would feed through to the structure of costs that suppliers face, and how they are passed onto consumers through tariffs and bills, including the role of the retail price cap. We therefore expect the outcomes of this review to focus on how the underlying costs are passed through to consumers. Some options may be simpler and quicker to implement than others. For example, varying costs based on the volume of energy used is a principle that already exists now in the system more generally and in relation to consumer tariffs. Alternatives, such as allocating system costs on metrics such as time of use or ability to pay, would be a bigger step change relative to current arrangements. This call for input (CfI) describes the types of options we could possibly explore further. The specific policy options we identify to assess in more detail will be subject to further evidence and assessment, including feedback from this consultation. 1.10 Alternative models to allocating and recovering costs already exist in other markets. For example, mobile and broadband telecoms predominantly operate on a single standing charge model, with a flat price per month with additional charges for extra use or features, like increased connection speed or using a mobile phone abroad. In rail transport, consumers face charges based on the time of their travel through peak and off-peak ticket pricing. Charges like Council Tax are levied on ‘wealth’, using a home’s value as shorthand for a household’s ability to pay. All these options come with trade-offs and practical challenges when implementing, which we will need to consider as part of our assessment of options for what may be possible within the energy sector. 1.11 In summary the typical energy bill comprises four broad categories of cost: 8 Call for input – Energy System Cost Allocation and Recovery Review 1) Wholesale costs: The cost of the fuel and infrastructure that produces it (these costs vary over the day, tending to peak when demand is highest in the evening); 2) Network costs: The cost of the network infrastructure that moves energy from where its produced, to where it’s needed; i. Physical network infrastructure: The costs of pipes and cables. ii. Balancing the systems: The cost that System Operators (SOs) face when trying to balance supply and demand, ensuring continuous security of supply, or costs related to system congestion. 3) Supplier operating (‘retail’) costs: The cost of providing energy and services to individual consumers, like billing, call centres, metering etc; and 4) Policy costs: The cost of government schemes to drive energy efficiency, provide affordability support and support new technologies. 1.12 Taken together, we refer to these costs in aggregate for the purpose of this document as ‘energy system costs’. As we move towards a clean power system, the size of the infrastructure elements of the costs of the system will increase. Some of these infrastructure costs are funded through network costs, but others will be funded through policy costs. This is because the cost of renewable generation infrastructure is funded by a combination of wholesale costs and CfDs, which we include in policy costs. Not all infrastructure is recovered through the standing charge. Under current charging arrangements, the investments in the electricity transmission network will be recovered through the standing charge, whereas the cost of renewable generation infrastructure investment is recovered through the unit rate. 1.13 The size of these costs will be affected by a number of factors, including but not limited to the amount of energy demand. Demand for energy also varies significantly over the day and between seasons. Demand currently tends to peak in the evenings (normally around 4-7pm on weekdays), on cold winter days or when weather patterns impact renewable output. The energy system is built to serve this peak demand, so if consumers (domestic and non-domestic) shift their consumption to less peaky times or when there is less supply, this can reduce the total size (and cost) of the energy system needed to meet peak demand over time. Annex 1 provides more information on these costs, including how they are currently recovered from domestic and non-domestic consumers, and how we expect these costs to evolve as GB transitions to a cleaner and more secure 9 Call for input – Energy System Cost Allocation and Recovery Review energy system. Chapter 2 summarises the results of our initial consumer research and highlights key examples of changes to energy system cost recovery approaches from overseas. 1.14 When it comes to recovering energy system costs from consumers, there are some fundamental choices that can be made about how costs are shared. In our existing market arrangements, these choices are not made by one body, but sit across both Ofgem and the government. These choices include: a) What is recovered from energy bills vs. general taxation; b) For costs that are on energy bills, we then have choices around: i. How they are allocated across gas and electricity bills; ii. How they are allocated and recovered between domestic and non- domestic consumers. For example, whether one group should pay more or less for the system costs; iii. How they are allocated and recovered within these two broad groups. This could be based on an ability to pay for domestic consumers, or different charges for different business sectors. It could also be based on more technical criteria, such as the amount of energy used, usage at peak times or the potential capacity to use energy. c) Whether to provide additional targeted support for those who need it, that results in costs with a fair and acceptable distribution across consumers. This could be via a bill support or direct benefits for domestic consumers, or discounts for specific non-domestic customers or energy intensive users. 1.15 Some of these decisions sit solely with government, such as (a) and (c). But others will depend on various factors such as the specific system cost. We are working closely with government to ensure we take an overall coherent approach to the allocation and recovery of energy system costs. 1.16 Some decisions, such as how costs are shared through bills or taxes, or who gets extra support, are rightly for the elected government and not Ofgem. However, many choices are made jointly by government and Ofgem, shaping what goes into energy bills and how costs are recovered from consumers. Ofgem’s role is to protect all consumers, both now and in the future, and for that reason we are keen to ensure that we look at bills in the round, considering all the costs and options available and how these feed through to consumers. 10 Call for input – Energy System Cost Allocation and Recovery Review 1.17 There are also a series of more detailed choices about how energy system costs are recovered from energy bills via the way in which those charges are structured: a. How charges vary with the amount of energy used: To date, the typical domestic GB charge has been a ‘two-part tariff’, comprising a fixed charge and unit rate. For non-domestic consumers, this structure and balance begins to vary as consumers use more energy. Compare this to other sectors – for example subscription style pricing models where nearly all the charges get bundled into a fixed monthly charge, with extra charges for use over and above a certain limit (for example, mobile phones, entertainment platforms). Other goods are priced purely based on usage or unit rates, with no fixed cost element (for example, petrol and groceries). b. How charges vary with time of use: For example, time banding (such as peak pricing train tickets) or pricing that reflects demand and supply at that point in time. c. How do the charges vary with the location of use: For example, for electricity distribution networks, there are different charges for each region that reflect the different conditions there. In other sectors, charges for the provision of water and wastewater services vary across regions, based on the different costs of providing services in each region. By comparison, the cost of a postage stamp is fixed across the country. d. How charges vary with ability to pay: For example, council tax depends on house values, which can be a proxy for wealth. Or means tested tariffs and subsidies. 1.18 Chapter 3 draws on these choices to identify possible options to recover energy system costs from domestic customers. We welcome stakeholders’ views on which specific policy options we should explore in more detail as part of our review. Whilst we don’t identify specific options in relation to: a. recovering system costs from non-domestic consumers; or b. methods for allocating system costs between the domestic and non-domestic sectors. 1.19 We welcome views from stakeholders on whether we should explore changes to the current approaches and methods for allocating costs to non-domestic consumers as part of this review. 11 Call for input – Energy System Cost Allocation and Recovery Review 1.20 Finally, chapter 4 sets out our initial thoughts on the assessment framework we should use to evaluate options, the evidence we should draw on and how trade- offs can be assessed. Related policy areas and themes 1.21 This review does not replace any existing and related work, and we're working closely with government to ensure coherence with wider policy work. Related policy areas include: • Standing charges: In February 2025, we asked for people's views on introducing a zero standing charge variant to the default tariff cap. We subsequently published an update in July on options for mandating a low or zero standing charge tariff option in the competitive market. The Cost Allocation and Recovery Review builds on that work, including by looking at all system costs and by exploring changes to cost allocation and recovery methods. • The Review of Electricity Market Arrangements (REMA): REMA was established to ensure electricity market arrangements support a decarbonised, cost-effective, and secure electricity system fit for the future. In July 2025, the government announced that it will retain a single national, GB-wide, wholesale market pricing regime and will deliver a package of national reforms. This package of national reforms aims to deliver a more strategic and co-ordinated approach to the energy system, provide stronger signals for efficient siting of new assets and improve overall operational efficiency, whilst also increasing stability and certainty for investors. The government plans to publish a Reformed National Pricing Delivery Plan later this year, including a timeline with key activities for implementing reformed national pricing. • Network charging with location-based signals: An important element of the government’s decision to reform a national wholesale electricity market is to reform network and connection charges so that they guide demand and supply sources to locations where grid capacity is likely to be available at the time they are likely to connect. Following the government’s decision on REMA, we published an open letter to set out our initial thoughts on how electricity network charging signals could be reformed to provide greater predictability and align with strategic plans. • Clean Flexibility Roadmap: In July 2025, government published their Clean Flexibility Roadmap. This is a blueprint for how government aims to deliver the 12 Call for input – Energy System Cost Allocation and Recovery Review clean flexibility capacity required for clean power by 2030 and net zero by 2050, as part of our Clean Energy Superpower Mission. The scope of the Roadmap includes both short and long duration flexibility technologies. Broader policy areas such as market reform, network connections and digitalisation are also included in the Roadmap as critical system-wide enablers, to boost flexibility capacity. • Industrial Strategy: The Department of Business and Trade (DBT) published the Industrial Strategy at the end of June. For energy, the strategy targets non-domestic electricity costs, timely grid connections, investment in clean energy and strengthening connections to the European Union (EU) energy market. These aims should in turn support energy security. Specific policies that are related to our review include increasing support for energy intensive businesses through the British Industry Supercharger package (via an uplift of the Network Charging Compensation from 60% to 90%), an outlined new policy called the British Industrial Competitiveness Scheme that will expand electricity price support to manufacturing electricity intensive frontier industries in their core sectors and considering wider energy market reform. We expect DBT to consult further on the details of these policies. • Gas system call for evidence on network investment and affordability: This Autumn, the government intends to publish a call for evidence on gas network investment and affordability. It will seek views on alternative investment recovery options. This will not cover standing charges but will focus on recovering network charges that are a result of investment and maintenance of the gas distribution and transmission network. 1.22 We have also published our latest domestic consumer insights alongside this CfI. This consumer research covers our latest findings from the omnibus consumer survey, as well as the domestic consumer deliberative research we have conducted as part of this review. Responding to this call for input 1.23 This CfI will be open to responses until 24 September 2025. We invite stakeholders’ views on any aspect of the issues raised in this paper and in particular on the questions asked. Questions are included in the relevant section and a full list of consultation questions is included in chapter 5. Responses to be sent to Cost Review costreview@ofgem.gov.uk 13 Call for input – Energy System Cost Allocation and Recovery Review Your feedback 1.24 We believe that feedback is at the heart of good policy development. We are keen to receive your comments about this report. Please send any general feedback comments to Cost Review costreview@ofgem.gov.uk. We’d also like to get your answers to these questions: 1) Do you have any comments about the overall process of this report? 2) Do you have any comments about its tone and content? 3) Was it easy to read and understand? Or could it have been better written? 4) Are its conclusions balanced? 5) Did it make reasoned recommendations for improvement? 6) Any further comments? 1.25 In accordance with our consultation policy, we might publish non-confidential responses on our website. If you’d like the whole or any part of your response to be kept confidential, please mark those parts as such. If possible, put any confidential material in separate appendices marked ‘confidential’. 14 Call for input – Energy System Cost Allocation and Recovery Review 2. Consumer research and international examples This chapter summarises the findings of our initial domestic consumer research and highlights some of the international energy examples we have explored to date. We welcome stakeholders providing information and evidence, as well as their own analysis in response to this CfI, including by highlighting examples in other markets (including but not limited to energy) that we should consider. Domestic consumer insights 2.1 Consumer research is an important component of our evidence base, and our understanding of how we can develop policy that creates the best outcomes for consumers. In this chapter we provide an overview of some of our domestic consumer insights and research. We have recently published research on domestic consumers' views on energy pricing, with this work summarised here. Omnibus survey 2.2 The purpose of this survey was to understand domestic energy consumers’ top-of- mind views towards energy pricing structures. Annex 2 provides details on how this has been conducted, including sample sizes. 2.3 When asked how fair they considered standing charges are as a way of charging for energy, 62% of participants said they thought they were somewhat/very unfair, while 19% said they thought they were somewhat/very fair. By contrast, when asked how fair unit rates are as a way of charging for energy, 54% said they perceived them to be somewhat/very fair, while 23% said they deemed them somewhat/very unfair. Those consumers who are older, those in lower C2DE social grades (for example skilled, semi-skilled and unskilled manual occupations), and those on a lower income (household annual income lower than £55k per year) were all more likely to say they consider standing charges to be unfair. 2.4 Participants were then asked for their preferences given a trade-off between increasing standing charges and decreasing/removing unit rates (and vice versa). As shown in Figure 2 below, stated preferences leaned more towards removing or reducing standing charges and increasing unit charges, or keeping the current structure, rather than reducing/removing unit rates and increasing standing 15 Call for input – Energy System Cost Allocation and Recovery Review charges. Nearly 3 in 10 (28%) said they would prefer to remove standing charges completely and increase unit rates, while 23% said they would prefer to reduce standing charges and increase unit rates. 22% stated a preference for keeping the current structure of standing charges and unit rates. However, a significant proportion (18%) said they don’t know. Figure 2: Consumers' stated preferred cost structure for energy bills, January 2025 Source: Ofgem, Pricing Omnibus Survey. Research conducted in January 2025. 3,571 GB domestic energy consumers took part in an omnibus survey delivered by Ipsos. Domestic consumer deliberative research 2.5 While the omnibus survey reveals consumers’ top of mind views towards energy pricing, participants were not provided with an opportunity to consider the costs and benefits of each option and any trade-offs. To explore consumers’ considered views, Ofgem undertook additional deliberative research with the agency Thinks Insight and Strategy. This seeks to understand the public’s values and explore how they make difficult trade-offs, after weighing up different evidence and information. The participant sample included consumers from across Great Britain, ensuring diversity in terms of key demographics, energy payment methods, tariff types, suppliers, and vulnerability status. Participants undertook pre-work before 16 Call for input – Energy System Cost Allocation and Recovery Review joining the sessions to understand their baseline understanding of key energy issues. 2.6 ‘Affordability’ was the number one priority for participants when considering the future of energy pricing and tackling this challenge was typically viewed as essential before turning attention to other issues. Participants consistently set out their support for the creation of a ‘fair’ system, with a strong desire to protect vulnerable consumers. Many felt that they wanted to see support come primarily through government but there were very low levels of awareness about current government schemes to support vulnerable consumers. 2.7 Participants tended to intuitively favour a simpler and more predictable system over one that gave them more control but with greater variability of costs, primarily because such a system could leave vulnerable groups behind. However, participants recognised a more ‘control’-led system could drive positive behaviours and save consumers money if they engaged. Finally, consumers were broadly enthusiastic about investing in innovation and were, in principle, willing to pay for it. Recognising that investing now in innovative technologies and approaches could pay dividends (in terms of lower bills) in the future. However, there were significant issues of trust in relation to energy companies and the government, and Britain’s poor record on infrastructure was often cited. Therefore, consumers wanted assurances that innovative projects would be delivered on time and to budget, with savings passed onto consumers. With these assurances in place, participants were far more supportive of investments in innovation. Cost allocation online experiment 2.8 This experiment was conducted to see how the direct presentation of trade-offs between standing charges and unit rates, alongside information provision, influenced consumer attitudes and behaviours towards recovering fixed costs. One key aspect was a cost allocation task, where participants were asked how much they would ideally set standing charges as. The experiment allowed for trade-offs to be shown to respondents in real time, as they decreased standing charges, unit rates would increase and vice versa. For more information on the methods used please see Annex 2. 2.9 Over half of participants (approximately 50%) rated standing charges as unfair, compared to fewer than 25% who felt the same about unit rates. Overall, the majority of participants (58%) preferred to reduce standing charges. 17% of 17 Call for input – Energy System Cost Allocation and Recovery Review respondents chose to keep standing charges the same, and 25% opted to increase standing charges. 2.10 When participants were presented with information of the impact of reducing or increasing standing charges on unit rates and then asked whether they would how they would change standing charges, we saw fewer consumers wanted to fully remove standing charges (11% versus 28% in omnibus) and far more consumers wanted to increase standing charges (25% versus 9% in omnibus). This may be because this task provided more detailed information about the trade-offs between standing charges and unit rates which could reduce the strength of opposition towards them. The lack of a 'don’t know' option also could have led to more moderate results. 2.11 Providing more information on the reasons behind standing charges lead them to be perceived as slightly less unfair (4% point reduction) and slightly fairer (5% point increase). Participants with lower energy use were more likely to perceive standing charges as unfair. Higher energy users also allocated significantly more to standing charges. However, even when told reductions to standing charges would raise their bills, most participants still preferred a small decrease in them. Further research 2.12 We have initially identified areas where we intend to do further research. These include: 1) Consumer tariff trial: We have published an open letter for engagement on Ofgem’s upcoming ‘Split Standing Charge Tariff Trial’ multi-part tariff. This trial aims to explore whether linking daily standing charges to capacity usage can encourage consumers to shift usage away from peak times. This supports reducing system costs, providing consumers with more control, and unlocking domestic flexibility at scale. 2) Ongoing consumer surveys: We will continue to engage with consumers and their opinions via our regular consumer surveys. International examples 2.13 As part of our initial research, we have looked at comparable energy markets around the world, including the Swedish, Californian and Australian electricity markets. We have seen a range of different options being pursued in relation to the allocation and recovery of energy system costs from consumers. However, a 18 Call for input – Energy System Cost Allocation and Recovery Review consistent theme was that no simple or single policy solution exists – all the available options require trade-offs, including between efficiency, affordability and simplicity. Below we summarise some of the key findings from these international examples. Sweden 2.14 We have looked at electricity market arrangements in Sweden where there are some similarities to the GB market, and as well as notable differences. Like GB, Sweden has large amounts of electricity generation in the northern parts of the country which then needs to be moved to demand centres in the south. However, the consumer supplier interface is different to GB. There are approximately 160- 170 electricity network companies in Sweden, who effectively act as electricity suppliers as well. Further, the regulatory framework provides the core principles of charging and cost recovery. However, it is up to the network companies to apply these and come up with the detailed tariff structures. 2.15 In March 2022, the Swedish Energy Markets Inspectorate (Ei) implemented new regulations regarding the design of electricity network tariffs. The rules aim to promote efficient network use and cost-reflective pricing for domestic consumers, thus help to ensure Sweden’s electricity needs can be met at the lowest possible cost. The network companies are responsible for applying the new rules to calculate their tariffs. The new regulations will be implemented by January 2027 at the latest and state that electricity tariffs need to be composed of four parts: 1) An energy fee: The fee is charged in relation to the cost of electricity transported in the electricity network, and is based on costs that vary with the customers’ use of the network in the short run (for example, network losses). The fee can also be time-differentiated, which means that it can be divided into high- and low-price time over the day; 2) A (time-differentiated) capacity fee: This fee is time-differentiated and should be cost-reflective. This means that it must be different at different times to reflect how the load on the electricity grid varies over time. As a result, it provides a price signal about future network costs that reflects costs of capacity-enhancing measures, such as building new network. Consumers can therefore receive a higher or lower cost depending on their behaviour (for example, lower costs if they reduce demand at peak times); 19 Call for input – Energy System Cost Allocation and Recovery Review 3) A customer-specific fee: The customer-specific fee is based on the costs of metering, billing, and broader customer services to a specific customer or customer group. It is set as a fixed amount per customer; 4) A fixed fee: This covers ‘residual costs’, which represents the difference between the amount of revenue a company has received, and the amount they are allowed to receive. This should be perceived as a fixed fee, and not affect investment or consumer demand. It’s charged to consumers based on the size of the main fuse, and capacity, at their home. 2.16 Sweden's four-part tariff structure aims to ensure transparency and cost-reflective fees that create incentives for efficient use of the network. It pursues this goal by encouraging consumers to adjust usage patterns, promoting a more stable and efficient electricity network. The regulatory approach in Sweden also expects the grid operators to plan and invest in infrastructure, supporting long-term sustainability. California 2.17 We have also considered market arrangements in California. California is divided into Northern and Southern regions, and each utility company is assigned an electric utility service area. Unlike in GB where the market is fully liberalised, California’s market is partially liberalised with companies either Investor-Owned Utilities which are privately owned by shareholders and regulated by the California Public Utilities Commission (CPUC), or Publicly Owned Utilities which are owned by local governments and public agencies. These are governed by local boards, not regulated by CPUC. The electricity market in California has higher levels of solar generation compared to GB. This is creating cost allocation and recovery issues as consumers with household solar and batteries may contribute less to fixed costs in the system as they can generate their own electricity. However, it may then leave a smaller group of customers (without access to solar and battery) paying for the system’s fixed costs. 2.18 California provides discounts on electricity and natural gas bills to income- qualified households through its CARE and FERA programmes. The discount received by domestic consumers is dependent on their total household income and linked to the Federal Poverty Guidelines. Consumers must apply for the programmes via their energy supplier with the programmes being funded by a rate surcharge paid by all other utility consumers. We’re aware that accurate data collection regarding a household’s income level is a significant challenge. To 20 Call for input – Energy System Cost Allocation and Recovery Review address this, CPUC are considering working with a state of California food assistance programme, which also requires income verification as part of its enrolment, to automatically enrol recipients into the energy bill discount programmes to ensure eligible consumers also receive the energy bills discount. 2.19 On 9 May 2025, CPUC approved proposals to reduce the price of residential electricity through a new billing structure, which it hopes will support the transition away from fossil fuels. This billing adjustment introduces a flat rate bill component and reduces the electricity usage rate, meaning some of the fixed costs in the system will be recovered via the new flat rate. Customers enrolled in the low-income assistance programmes referenced above will benefit from a discounted flat rate. The new billing structure does not introduce any additional fees or generate extra profits for utilities. Instead, it redistributes existing costs among customers. Australia 2.20 As well as considering the Swedish and Californian market arrangements, we have also considered Australia. There are similarities between the UK and Australia in that both countries have a concentrated supplier base, with smaller retailers gradually increasing competition. However, whilst the UK market is highly centralised and fully liberalised, Australia's federated market varies by state. Although the National Electricity Market (NEM) covers most regions, there is a mixture of public and privately owned companies that vary by state. Like California, the Australian markets are also characterised by relatively high levels of domestic solar generation. Deployment of new technology such as solar and batteries creates opportunities and risks. They may help consumers reduce their contribution to network bills. However, this may result in transferring their share of fixed network costs onto other consumers. This scenario creates related but different cost allocation and recovery considerations compared to GB. For example, cost avoidance driving up fixed costs for other consumers, compared to large infrastructure investment driving fixed costs. 2.21 Three Australian states, South Australia, Victoria, and Queensland, recently reformed their network tariffs to improve cost reflectivity, particularly for businesses. Changes included introducing time-of-use pricing and capacity-based charging models. These changes were also automatically applied to domestic consumers with smart meters, alongside Australia’s smart meter rollout. This resulted in some domestic electricity consumers in Australia experiencing increased costs due to time-of-use pricing structures. The tariffs, implemented to 21 Call for input – Energy System Cost Allocation and Recovery Review encourage more efficient energy consumption, has led to higher bills for those who are unable to adjust their usage patterns to off-peak times. These reforms have been poorly received by non-domestic consumers who did not actively choose a time-of-use tariff. 2.22 On 25 July 2024, the Australian Energy Market Commission (AEMC) self-initiated a broad, forward-looking review of Australia’s electricity market. With solar panels, batteries, EVs and neighbourhood batteries becoming increasingly commonplace in Australia, the AEMC is examining how Australia’s electricity pricing needs to evolve to ensure that its pricing frameworks keep pace with how consumers use and interact with the energy system and there is an efficient and equitable approach to sharing the costs of the distribution network amongst all energy consumers. Question 1: What other examples or evidence from relevant sectors or international energy markets should we consider as part of our review? 22 Call for input – Energy System Cost Allocation and Recovery Review 3. Options In this chapter, we set out some broad options for changing the way in which energy system costs could be recovered from domestic consumers. Many of these stylised options could be combined or tailored to develop more specific policy options for further consideration and assessment. Whilst we don’t set out options, we are open to exploring alternative approaches and methods to: recovering energy system costs from non-domestic consumers; and allocate costs between the domestic and non-domestic customer segments, if alternative approaches would be in consumers’ interest. Our aim is to explore options that could better protect energy customers during the transition to a greener and more secure energy system, while supporting economic growth. Options to recover energy system costs from domestic consumers 3.1 At present, wholesale costs, most policy costs and costs to balance the network are recovered from domestic consumers via volumetric charges. The majority of costs associated with investing in and maintaining the physical electricity network are recovered from consumers as a fixed cost, via the standing charge. 3.2 As set out in chapter 1, there are several broad options for amending the structure of charges and therefore the way in which energy system costs are recovered from domestic consumers. In this chapter we explore a range of thematic options for making changes to the ways that energy system costs are allocated to and recovered from consumers. 3.3 Any specific decisions taken by Ofgem to change the way energy system costs are allocated to, and recovered from, consumers will need to be consistent with our statutory duties and the overall legislative framework. We are deliberately keeping the option set open at this stage to seek views and evidence from stakeholders in response to this CfI, so we can then focus our detailed assessment on a shorter list of options for a subsequent policy consultation. 3.4 We acknowledge that our assessment of these options will also be affected by decisions taken by government. We are working closely with government to ensure we take an overall coherent approach to the allocation and recovery of energy system costs. 23 Call for input – Energy System Cost Allocation and Recovery Review 3.5 Below we set out initial, high level of options by theme, demonstrating how cost allocation and recovery could be amended to address different challenges. A. How charges vary with the amount of energy used: To date, the typical domestic GB charge has been a ‘two-part tariff’, comprising a standing and volumetric charge. Compare this to other sectors – for example subscription style pricing models where nearly all the charges get bundled into a fixed monthly charge, with extra charges for use over and above a certain limit (mobile phones, entertainment platforms). This compares to other goods, which are purely based on usage, with no fixed cost element (for example, petrol and groceries). The options below cover both volume and system use. 1) Option A1: standing charge based on maximum use 2) Option A2: reduced standing charge, greater recovery from the unit rate 3) Option A3: no standing charge, recover all system costs from a single unit rate i. Option A3(i): unit rate is a falling block tariff ii. Option A3(ii): unit rate is a rising block tariff B. How charges vary with time of use: For example, time banding (such as peak pricing train tickets) or pricing that reflects demand and supply at that point in time. 1) Option B1: standing charge linked to use at peak times 2) Option B2: lower standing charge, offset by higher unit rates linked to use at peak times C. How charges vary with the location of use: For example, charges for the provision of water and wastewater services vary across regions, based on the varying costs of providing services. Whereas the cost of a particular type of postage stamp is generally fixed across the country. 1) Option C1: Standing charges vary regionally, reflecting different costs and signals 2) Option C2: Standing charge applies consistently to all GB regions D. How charges vary with ability to pay: For example, if a progressive approach was desired, then energy system fixed costs could be allocated and recovered (pre- distribution) based on a proxy for wealth. For example, council tax is funded in this way. 1) Option D1: Income-based standing charge 2) Option D2: Wealth-based standing charge 24 Call for input – Energy System Cost Allocation and Recovery Review 3.6 The above menu of example options can be modified and combined in multiple different ways - for example into a three- or four-part charge, which includes a fixed, unit, and capacity and time of use charge. Question 2: What options for amending domestic cost allocation and recovery should we explore in more detail and why? What options should we rule out at this stage and why? Question 3: How would changes to the underlying rules and approaches for allocating and recovering system-wide costs be expected to translate into the tariffs offered by suppliers? Options to recover energy system costs from non-domestic consumers 3.7 At present, wholesale costs, policy costs and costs to balance the network are recovered from non-domestic consumers via volumetric charges. The majority of costs associated with investing in and maintaining the physical electricity network are recovered from non-domestic consumers via a set of banded fixed charges that increase with the size of the business. 3.8 The amount of money allocated to a band relates to the volume consumption of the users in it, which is consistent with how costs are allocated between the domestic and non-domestic segments. How users are allocated to bands is slightly more complex and reflects different availability of data for different users. Small distribution connected sites who do not have agreed capacity with their distribution network, that is to say they have not agreed and reserved an allowed level of capacity on the network, are allocated to bands based on their consumption. Larger users with agreed capacity are banded using this capacity, as capacity tends to be a major cost driver of distribution networks that reflects the investment that has had to be made to provide the service to the users. The largest transmission-connected sites are banded by their consumption, as capacity information is not available for the transmission network. A key feature of banded charges is that all users within a band face the same charge. 3.9 These arrangements are the result of recent changes implemented following our Targeted Charging Review (TCR). Following concerns about users’ ability to avoid charges, the top-up charges for distribution were moved in 2016 from peak-time volumes to all consumption. Further change took place in 2022/23 when transmission and distribution charges were all moved to a fixed basis based on 25 Call for input – Energy System Cost Allocation and Recovery Review capacity, rather than utilisation. This moved away from a transmission charging model that was based on peak-time use, again following concerns about how avoidable the model had become. This aimed to ensure all parties connected to the network made a fair contribution to the fixed costs by preventing actions that could reduce their exposure to this part of the charge. 3.10 The strong feedback from consumers we have received in recent years relating to standing charges mainly relates to the domestic sector. However, non-domestic consumers have also provided feedback on how current cost allocation and recovery arrangements have affected them. Changes to charging arrangements as a result of the TCR have meant fixed costs have increased for some non- domestic consumers, particularly for larger distribution-connected sites, as the charging bands for fixed costs are based on voltage level and agreed import capacity. Some non-domestic consumers have also highlighted how the TCR changes, which led to a large reduction in the incentives present in the Triad arrangements for calculating some network charges, has led to increases in the charges they receive. We are also aware of the challenges non-domestic consumers in GB face in relation to relatively higher (compared to similar economies) electricity costs. This risks disincentivising electrification in the non- domestic sector, as well as impacting wider competitiveness. 3.11 The government has recently published its Industrial Strategy and its Clean Flexibility Roadmap. The Industrial Strategy announced an increase in support for energy intensive businesses through British Industry Supercharger package through an uplift of the Network Charging Compensation from 60% to 90%. This is in addition to existing support government provides to eligible energy intensive business. Government will also publish its industrial decarbonisation strategy in 2026. We are therefore interested to hear from stakeholders whether there are options we should consider that would benefit consumers, for example, by supporting economic growth, decarbonisation and the further provision of flexibility in the non-domestic sector. 3.12 Both sets of concerns set out by domestic and non-domestic consumers outline the complex trade-offs between options, and how costs are allocated and recovered between different consumer groups. 3.13 We would like to understand the nature of the non-domestic sector in more detail. When responding to the question below, we would encourage stakeholders to consider when and how non-domestic consumers use their energy. We would also like to understand how cost allocation and recovery methods could impact their 26 Call for input – Energy System Cost Allocation and Recovery Review decisions to decarbonise and participate in flexibility. Responses may also consider barriers or incentives. Question 4: What options for amending non-domestic cost allocation and recovery should we explore in more detail and why? What options should we rule out at this stage and why? Options to amend the split of energy system costs recovered from the domestic and non-domestic sectors 3.14 At present, wholesale, policy and network balancing costs are recovered from consumers via volumetric charges. The majority of costs associated with investing in and maintaining the physical electricity network are recovered from consumers as a standing charge, with different methods utilised in each of the domestic and non-domestic segments. These costs are split between the domestic and non- domestic sectors based on the relative volumes of each sector, resulting in a broad split of 40% for domestic, and 60% for non-domestic. 3.15 Whilst we do not have specific options in mind, we are open to suggestions from stakeholders on whether we should consider alternative methods for allocating these costs between the domestic and non-domestic sectors, if such alternative methods would benefit consumers. Question 5: Should we consider alternative methods for splitting network costs between domestic and non-domestic consumers? If so, what methods should we consider and why would these alternative methods benefit consumers? Key issues and trade-offs 3.16 The purpose of this CfI is to seek feedback and evidence from stakeholders to help us develop a shortlist of more specific policy options for further consideration and assessment. As we are not proposing specific policy proposals at this stage, we have not sought to provide a detailed assessment of each option and are instead seeking stakeholder views on our proposed assessment framework, the key sources of evidence we should use and how we should assess key trade-offs (see the next chapter for more on this). That said, this section highlights some of the key issues and trade-offs associated with the different types of options that have been identified above. 27 Call for input – Energy System Cost Allocation and Recovery Review Amount of energy used 3.17 Models linked to system use might include a greater emphasis on volumetric charges. We recognise, as set out in chapter 2, that some stakeholders consider volumes to be a more intuitive or fairer way of apportioning costs. There are practical benefits to a model based on volumes, as consumption data is available for all users. Drawbacks include potentially larger changes in the charges of users compared to the current approach, and the lack of a clear link to aggregate volumes in the drivers of the infrastructure investment needed in the system, where capacity tends to play a greater role. Further, recovering all the system costs through variable charges may distort and dampen signals for consumer-led flexibility. Charges based on usage could also result in more wealthy consumers with solar panels, for example, avoid making proportionate contributions to the network, which is built to serve peak demand when the sun is unlikely to be shining. This could result in a smaller group of consumers, without access to solar, paying for the system’s fixed costs. Usage based charges could also penalise consumers who have unavoidably high usage, for example, those with a health condition that rely on high usage, such as needing a dialysis machine. 3.18 Greater emphasis on total capacity (maximum use) as a cost driver is another option, and one that relates to the investment of the system more directly (which is built to serve peak demand). However, this kind of charge could be perceived to undermine the decarbonisation of the transport and heat sectors, by disincentivising domestic consumers to switch to EVs and heat pumps and disincentivise non-domestic consumers to decarbonise industrial processes. It might also be more complex to implement if users without smart meters and the largest users do not have capacity data, so data would need to be made available or estimates or proxies used. Reduced levels or removal of standing charges 3.19 As a regulator, we cannot make energy system costs go away and so if we were to explore options that involve smaller or no fixed charge as part of our cost allocation and recovery review, the relevant costs would need to be recovered from customer via some other charge, for example, the unit rate. 3.20 In our February zero standing charge consultation, we set out options for a zero standing charge variant of the price cap that consumers could choose to opt-in. In our July update, we set out options for mandating a low or zero standing charge tariff option in the competitive market. We are keen to bring about an increase in choice and control for consumers about how standing charge costs are paid 28 Call for input – Energy System Cost Allocation and Recovery Review sooner than what would be possible via the price cap, with the cost allocation and recovery review providing a more enduring solution. 3.21 A low or zero standing charge tariff could bring benefits for some consumers, providing them with more choice and control about how they pay for their standing charge costs. These tariffs will more closely reflect changes in customer consumption and will allow consumers more control of their energy bills. We note that there may also be circumstances where domestic consumers would get personal benefit from a low or zero-standing charge, even if they may not be financially better off over a year. For example, prepayment consumers are more likely to manage their household budgets on a week to week or month to month basis. We have heard that many households would appreciate being able to budget only for