Ofgem has said the adjustment for cap period seven costs will remain within the additional risk allowance, and it is not proposing to move it. The position was set out in a consultation published on 16 May 2022 on possible wholesale cost adjustments to the default tariff cap1.
The consultation follows the February 2022 wholesale decision, in which Ofgem introduced an adjustment to the cap for unexpected standard variable tariff demand costs, shaping and imbalance costs, and backwardation in relation to cap period seven1. Ofgem concluded that a cap level increase of £61 per customer in cap periods eight and nine was required to ensure suppliers could recover their efficient costs related to cap period seven1.
The May 2022 consultation looks at whether suppliers are incurring additional efficient wholesale costs beyond existing allowances for cap periods eight and nine, and whether any further adjustment is necessary1. Ofgem said it does not currently have a minded to position on whether an adjustment is required, and that it may decide none is needed1. It also said it had decided to set an additional allowance of £12 for electricity shaping and imbalance costs, to be recovered across cap periods eight and nine1.
"In the February 2022 wholesale decision, we included the adjustment for cap period seven in the additional risk allowance."
On the treatment of the allowance over time, Ofgem proposed to create a profile of percentage allowances in the Annex 2 model, reverting to the original 1% additional risk allowance from cap period ten onwards1. It said this 1% additional risk allowance is currently worth around £3 per dual fuel customer over the six months of cap period eight, and around £9 per dual fuel customer in annualised terms1.
The consultation sets out expected costs per customer at benchmark consumption, which it gives as 3,100kWh for single rate electricity and 12,000kWh for gas1.
| Measure | Prepayment meters | Non-prepayment |
|---|---|---|
| Weighted average expected cost, dual fuel, cap period eight | £8 | £42 |
| Gas, cap period eight | £5 | £23 |
| Electricity, cap period eight | £3 | £19 |
| Lower quartile expected cost per SVT customer, cap period eight | £0 | £3 |
| Weighted average expected cost, dual fuel, cap period nine | £1 | £3 |
| Lower quartile expected cost per SVT customer, cap period nine | £0 | £0 |
Ofgem also estimated that the reduction in switching costs over the six months of cap period eight could be roughly £1.90 to £2.70 per dual fuel customer, doubling to around £3.80 to £5.40 in annualised terms1. It gave a separate weighted average expected cost per dual fuel customer at benchmark consumption for cap period eight of approximately £22 for prepayment meters and £17 for non-prepayment1.
Why it matters for households
The default tariff cap sets the maximum a supplier can charge a household on a standard variable or default tariff, so any change to the allowances inside it feeds through to the price cap level itself. The £61 per customer figure for cap periods eight and nine relates to costs Ofgem judged suppliers had already incurred in cap period seven, and the decision to leave that adjustment in the additional risk allowance means it stays part of the cap calculation rather than being moved elsewhere1.
For a household, the practical effect is that the way these wholesale costs are recovered is unchanged for now. The figures in the table are expected costs per customer at benchmark consumption, not the amount any individual household pays, and they differ by payment method, with prepayment figures lower than non-prepayment ones in each case1. Households on prepayment meters and those paying by direct debit are therefore treated differently within the same allowance.
The consultation also touches on costs that arise when suppliers refine their hedged positions close to the time of consumption, and on the costs of more customers than expected remaining on standard variable tariffs1. Both are shaped by wholesale prices, which reached record highs in winter 2021 and saw further increases and volatile conditions in spring 20221. How those costs are allowed for affects the level of protection the cap provides, and therefore how far a household's bills are insulated from wholesale market movement.
What happens next
Responses to the consultation were invited by 14 June 20221. Ofgem said it intends to publish a decision in August 2022, so that, if needed, any changes may come into effect from 1 October 2022, which is cap period nine1.
Sources1 cited
- Consultation, ofgem.gov.uk