Ofgem kickstarts review into energy cost allocation

At present, the energy system typically uses volumetric charges to recover wholesale costs, most policy costs and costs to balance the network from domestic and non-domestic consumers. It recovers the sunk costs of the electricity network via banded fixed charges that increase with the size of the user. Larger businesses and public buildings pay on the basis of their agreed capacity with the network.

The review aims to revisit the allocation of those costs, with a focus on creating a more equitable and transparent charging framework for both domestic and non-domestic consumers. Ofgem states that it’s aware of the challenges that GB’s non-domestic consumers face in relation to higher electricity costs when compared to similar economies. It notes how this disincentivises electrification in the non-domestic sector, as well as having a negative impact on wider competitiveness.

It asks for views on the options that would support customers, both within the energy bill and outside of it. However, while the regulator is exploring various specific options for domestic consumers, it’s not yet proposing any specific new price models for non-domestic consumers.

The key focus of the CfI regarding domestic consumers is fairness — ensuring that essential energy use remains affordable, while still creating incentives to shift usage and participate in flexibility. For example, domestic users, including many vulnerable or energy-efficient customers, currently bear the same base cost as higher-usage households.

The regulator is also exploring the cost split between the domestic and non-domestic sectors. The current arrangements recover fixed network costs on roughly a 40:60 basis, domestic and non-domestic respectively.

We’ve outlined below some of the themes underpinning the various approaches to pricing:

• Volume-based models — where unit costs rise or fall depending on usage blocks. This could result in significant year-on-year movements in energy costs and benefit those consumers able to invest in behind-the-meter generation such as solar panels.
• Time-based pricing — where cost signals reflect grid stress. Homes or businesses with the ability to operate outside peak periods, or make use of storage, or automate their response strategies (or combine two or all three strategies) could significantly reduce their exposure.
• Location-based use — where the charges align more closely to local grid constraints. This could create both risks and opportunities depending on site geography, since there are different physical characteristics across the regions, as well as differences in demand and population density across GB.
• The allocation of standing charges — including whether reduced or zero standing charges would result in better outcomes for consumers.

The CfI will be open to responses until 24 September 2025. Ofgem intends to publish a consultation on more specific policy options by the end of the year, although the timetable will depend on the responses it receives as part of this round of feedback.

For more information on the composition of current electricity bills, please read our ‘Electricity Prices Explained Guide’. If you’re not a customer or partner, you can access the abridged summary guide.

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