Ofgem published its decision on the Contract for Difference (CfD) allowance methodology in the default tariff cap on 23 June 2022, confirming that the £0/MWh floor will be removed from the CfD allowance from cap period nine, which begins on 1 October 20221.
The change follows an April 2022 consultation on amending the CfD allowance in the cap from cap period nine onwards, to which five suppliers responded1. The allowance is currently based on the Interim Levy Rate (ILR) published by the Low Carbon Contracts Company (LCCC), the unit cost chargeable as a £/MWh rate on eligible demand daily, which is set quarterly three months in advance of the relevant quarter1. Under the regulations governing the CfD, LCCC cannot set an ILR below £0/MWh, so a negative ILR cannot be passed through under the existing methodology1.
For cap period nine, LCCC has forecast negative payments from suppliers, reflecting increases in wholesale prices, meaning suppliers are expected to receive payments rather than make them1. In its consultation, Ofgem forecast that amending the methodology would make the cap £12.51 per customer lower for cap period nine; it has now recalculated that figure at £11.44 per customer1. The document states that LCCC updated its forecast for Q2 2022 on 12 May, and that the recalculation takes account of that forecast1.
"We have decided to remove the £0/MWh floor from the CfD price cap allowance by replacing the LCCC’s published ILR in our methodology with an expected levy payment, calculated using LCCC CfD payments forecasts and energy demand."
Ofgem also decided not to introduce a reconciliation of the CfD allowance against outturn costs1. It said all suppliers agreed the current methodology should be changed to be more cost-reflective, and that the main concern raised was whether a reconciliation mechanism should be introduced1. Ofgem concluded the issues underpinning those arguments are not resulting in material and systematic impacts1.
The cap was introduced on 1 January 2019 and currently protects 23 million households on standard variable and default tariffs1. Since its introduction, CfD costs have represented £25 per customer at typical consumption, around 2% of the total cap value, based on benchmark consumption of 3.1MWh per customer per year1. Ofgem also confirmed that generator delays will result in a £2.5 to £4 per customer additional cost impact in cap period eight1.
| Item | Figure |
|---|---|
| Supplier benefit under amended methodology, cap period nine | £11.44 per customer |
| Benefit forecast at April 2022 consultation | £12.51 per customer |
| CfD costs since cap introduction, typical consumption | £25 per customer, around 2% of total cap value |
| Additional cost impact from generator delays, cap period eight | £2.5 to £4 per customer |
Why it matters for households
The CfD allowance is one component of the default tariff cap, the mechanism that sets the maximum a supplier can charge households on standard variable and default tariffs. Because the ILR could not fall below £0/MWh, the cap did not previously reflect periods when high wholesale prices meant suppliers were net recipients of CfD payments rather than payers. Removing the floor allows that benefit to be passed through into the cap calculation, which Ofgem estimates at £11.44 per customer for cap period nine. For a household on a default tariff, this affects the level at which the cap is set rather than the amount billed directly, and it sits alongside other cap components such as wholesale costs and network costs. The decision does not set the value of the CfD allowance itself, only the method used to calculate it.
What happens next
The new CfD allowance methodology applies from 1 October 2022 onwards1. Ofgem states that a decision on how frequently the allowance will be updated will be taken following feedback on its statutory consultation on changes to the wholesale methodology1. The decision document does not set the value of the CfD allowance for cap period nine1.