Ofgem Eyes New Pricing Rules to Keep Clean Power Fair and Affordable for All

Ofgem is launching a central review today, examining how costs are currently distributed across the energy system and whether a different approach would better serve consumers. At the heart of this review is a simple but far-reaching question: how should energy bills be structured in the future? As part of the process, Ofgem is inviting stakeholders to share their thoughts on what a new pricing model could look like. Any proposals would eventually go out for wider public consultation.

The UK energy system is undergoing rapid evolution. Investments in maintenance and system upgrades are becoming more urgent. At the same time, the rise of renewables is expected to reduce reliance on imported fossil fuels, helping protect households from volatile global prices and contributing to a more stable market overall.

But as energy shifts, so too must the way we pay for it. Many households have voiced concerns about the current pricing model, which is based on a combination of a fixed standing charge and a variable unit rate. Some see this setup as outdated or unfair. However, studies show there is no explicit agreement on what a better model might look like.

Adding further complexity, both households and businesses are changing the way they use energy. Consumers are increasingly adopting new technologies that allow them to shift their energy use to different times of day. In many cases, they are also using more electricity than before, driven by the growth of electric vehicles, heat pumps and other electrified systems.

With energy now taking up a larger share of household budgets than in the past, Ofgem believes it is the right time to explore alternatives. The goal is to develop a fairer and more future-proof pricing system. A key priority is ensuring that rising fixed costs do not unfairly burden low-income or vulnerable consumers.

This new initiative, known as the Cost Allocation and Recovery Review, will provide a comprehensive examination of the entire energy system. That means examining everything from generation and transmission to how power reaches people’s homes. The review will assess the trade-offs between different ways of distributing costs and what those choices might mean for various types of consumers.

Ofgem CEO Jonathan Brearley said:  “As we transition to a more secure, homegrown, renewables-based energy system, unit costs may decrease due to reduced reliance on expensive and volatile gas. However, fixed costs – such as those needed to upgrade the energy network to deliver cleaner and more secure power to our homes – could rise. This shift in the make-up of system costs means we need to review how we pay for energy and carefully consider how these costs are distributed.  

“We know customers have real concerns about fairness and transparency in their bills, especially around fixed costs. That’s why we’re asking big questions about how and where these costs are shared – and whether there are better, fairer ways to do it.  

“The launch of this review is the next step in developing fairer pricing for a changing energy system, ensuring more choice for consumers while protecting those most in need.”  

While some decisions, such as whether support should be delivered through energy bills or the tax system, will ultimately rest with the government, many critical choices are made jointly by policymakers and regulators. These decisions directly shape how costs appear on bills and how they are recovered across the system. Ofgem’s role is to protect consumers both now and in the future, which means ensuring the structure of bills is fair, transparent, and designed to reflect the changing nature of energy use.

Ofgem also plans to work closely with the government to ensure that their respective approaches are aligned. As the country transitions away from fossil fuels, particularly natural gas, variable costs associated with energy use may begin to decline. However, fixed costs, such as those associated with maintaining and upgrading infrastructure, are likely to increase. Clean energy comes with upfront investments, and those investments need to be paid for.

Costs cannot be eliminated, but how they are divided and displayed on consumer bills makes a significant difference. For some people, high fixed charges may discourage the use of clean energy or make electricity less accessible. That is why Ofgem is taking a closer look.

Right now, consumers pay for system costs through their regular energy bills. Electricity and gas are billed separately. These system costs encompass the full range of activities required to generate, transport, and deliver energy, from power plants and pipelines to customer service and billing. The total cost is then passed down to households and businesses alike.

The new review aims to determine whether this remains the best approach or whether a new model could serve the UK’s energy future more effectively.