Ofgem set an additional £12 allowance for electricity shaping and imbalance costs, to be recovered across cap periods eight and nine, after concluding in its February 2022 wholesale decision that these costs were materially higher than the price cap methodology accounted for in cap period seven1.
The regulator's May 2022 consultation document records that conclusion and sets out its wider review of whether suppliers were incurring additional efficient wholesale costs beyond existing allowances in the cap1. In the February 2022 wholesale decision, Ofgem said it "included the adjustment for cap period seven in the additional risk allowance"1.
"We, therefore, decided to set an additional allowance of £12 for electricity shaping and imbalance costs, to be recovered across cap periods eight and nine"
The same document states that Ofgem concluded 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. That figure covers the wider set of wholesale cost areas under review, not the £12 shaping and imbalance allowance alone.
The consultation, published on 16 May 2022 with a response deadline of 14 June 2022, also set out estimated costs per dual fuel customer at benchmark consumption of 3,100kWh for single rate electricity and 12,000kWh for gas1. For cap period eight, the weighted average expected cost was approximately £8 for prepayment meters and £42 for non-PPM, split as £5 and £23 for gas and £3 and £19 for electricity1. For cap period nine, the weighted average expected cost was approximately £1 for PPM and £3 for non-PPM1.
| Cost area | PPM | Non-PPM |
|---|---|---|
| Gas, cap period eight | £5 | £23 |
| Electricity, cap period eight | £3 | £19 |
| Dual fuel, cap period eight | £8 | £42 |
| Dual fuel, cap period nine | £1 | £3 |
Ofgem also proposed reverting to the original 1% additional risk allowance from cap period ten onwards, describing that allowance as currently worth around £3 per dual fuel customer over the six months of cap period eight, or around £9 in annualised terms1. It estimated the reduction in switching costs over the same six months at roughly £1.90 to £2.70 per dual fuel customer, doubling to around £3.80 to £5.40 annualised1.
Why it matters for households
The £12 allowance is a component of the cap, not a separate charge, so it feeds into the level of the default tariff rather than appearing as a line on a bill. It was set to recover costs suppliers incur when refining hedged positions close to the time of consumption, activity affected by wholesale prices at that moment1. For a household on a default tariff, the practical effect is that part of what is paid reflects costs incurred in an earlier cap period, recovered over cap periods eight and nine rather than the period in which they arose. The wholesale prices behind those costs are the same ones that drive changes in the cap level itself. How the allowance sits within the overall cap figure is set out in the guide to what makes up an energy bill.
What happens next
Ofgem said it intended to publish a decision in August 2022, so that, if needed, any changes could come into effect from 1 October 2022, the start of cap period nine1. The consultation proposed that any adjustment would be included in the adjustment allowance model1. The document states that Ofgem did not at that stage have a minded to position on whether an adjustment was required, and that it might decide no adjustment was needed1.
Sources1 cited
- Consultation, ofgem.gov.uk