UK’s Ofgem Launches Comprehensive Review of Energy Cost Allocation to Explore Fairer Pricing Models for Consumers

The UK’s Office of Gas and Electricity Markets on July 30 initiated a broad review into how costs are allocated across the energy system, aiming to assess the fairness and efficiency of existing pricing structures for consumers. The effort, titled the Cost Allocation and Recovery Review, will examine the full spectrum of energy system costs, from generation to household consumption, and explore a range of possible alternative pricing models.

The energy regulator said the review comes amid a transforming energy landscape. As the system undergoes a shift toward domestic renewables and undergoes substantial infrastructure upgrades, there is a growing need to reconsider how costs are shared. The current pricing model, which includes both a standing charge and unit rate, has faced criticism from consumers for being unfair. At the same time, changing patterns in energy usage, driven by new technologies such as electric vehicles and heat pumps, are reshaping demand profiles.

With fixed costs expected to rise as the system is modernized and made more resilient, Ofgem acknowledged the risk of disproportionate impacts on vulnerable or low-income consumers. The review will analyze how such costs are currently recovered through customer bills and weigh the trade-offs of potential alternatives, such as time-based or usage-based pricing.

At this stage, Ofgem is not endorsing any specific model but is soliciting stakeholder input to inform its approach, with future consultations planned. The agency emphasized that while some decisions around cost allocation fall under government jurisdiction, such as tax-based subsidies or targeted support, Ofgem plays a central role in shaping the framework that affects what consumers ultimately pay.

The regulator also noted that as reliance on global gas prices decreases, the variable portion of energy bills may decline, but fixed infrastructure costs are likely to climb. Ofgem intends to work closely with the UK government to ensure aligned policy goals as it aims to protect consumers and create a more equitable and transparent billing system. The office seeks input from peoples and organizations within the energy sector. Responses are due by Sept. 24.