Ofgem has decided to modify the gas and electricity supply licences to create a power to recalculate the Default Tariff Cap within a cap period in exceptional circumstances, and has decided that any such adjustment will be forward looking only. The decision, published on 4 February 2022, follows a November 2021 consultation on introducing an ability to amend the cap outside the routine six-monthly cycle1.
The regulator said the change would let it respond when the cap allowances materially deviate from efficient costs. The power sits in a modified condition, SLC28AD, and Ofgem will apply five tests before using it: the event must be rare, externally caused, not reasonably avoidable, appropriate, and require urgent action. The direction of an adjustment could be upwards or downwards depending on the impact of the specific circumstance. Ofgem said it would not set quantitative thresholds, because strict metrics would reduce its ability to respond to unknown future situations1.
"We have decided that in-period adjustments would be forward looking only when setting the cap level."
The cap was introduced on 1 January 2019 and currently protects around 22 million households on standard variable and default tariffs. Updates normally occur in February and August, applying to cap periods starting in April and October respectively. Ofgem said the reform changes to the cap methodology will not be in place until October 2022, and that it is also announcing changes to the cap level from 1 April 2022 covering an uplift to the wholesale cost allowance1.
Ofgem received responses from 20 stakeholders, consisting of energy suppliers, consumer organisations and trade bodies: ten disagreed with the proposal to introduce an in-period adjustment and eight agreed. It also received approximately 40,000 responses through a petition website, of which 86 per cent (34,000) said Ofgem should not change the price cap more frequently than every six months, while approximately 3 per cent (just over 1,000) said it should change it more frequently. Ofgem said 6.9 per cent made other comments1.
The decision document notes a record increase in global gas prices over the previous six months, with wholesale prices quadrupling in the last year, and that 29 energy companies have exited the market or been put in special administration over the last year1.
Why it matters for households
The Default Tariff Cap sets the maximum a supplier can charge domestic customers on default tariffs, so any change to how and when it is set affects what those households pay. The new power means the cap level could move between the scheduled April and October updates, rather than only at those points. Ofgem's decision that an adjustment is forward looking only means a change would apply for the remainder of the cap period in question, not to the whole period retrospectively, so it would not rewrite charges already incurred earlier in that period1.
The practical effect for a household on a default tariff is that the price it pays could change at a point other than the usual April or October reset, if Ofgem judged that exceptional circumstances applied. Ofgem has said the power is intended for exceptional circumstances only, and that it has not set quantitative thresholds for triggering it, so the timing of any future use is not fixed in advance. The rules on what suppliers must offer and the role of the regulator are set out in more detail elsewhere on this site.
What happens next
The reform changes to the cap methodology will not be in place until October 20221. Ofgem said it is also announcing changes to the cap level from 1 April 2022 covering an uplift to the wholesale cost allowance, and that it is consulting on cap reforms to be implemented by October 2022. It said it will consider whether further changes are required to the in-period adjustment policy once reforms from its work on adapting the price cap methodology for resilience in volatile markets have been implemented1.