Ofgem published a consultation on 16 May 2022 on whether suppliers are incurring additional efficient wholesale costs beyond the allowances already built into the default tariff cap, and whether any adjustment is needed for cap periods eight and nine1. The regulator said it does not currently have a minded to position on whether an adjustment is required, and that it may decide none is needed1. Responses close on 14 June 20221.
The consultation covers two cost areas: unexpected standard variable tariff (SVT) demand costs, where more customers than expected move to or stay on default tariffs and suppliers must buy extra energy above the cap wholesale allowance, and shaping and imbalance costs from refining hedged positions close to the time of consumption1. Ofgem said the area with the most, though still inconclusive, evidence of material additional costs is unexpected SVT demand for cap period eight, making it the main subject of the consultation1. It said there is not currently sufficient evidence of material additional costs in shaping and imbalance for cap period eight, or in either area for cap period nine1.
The regulator set out its initial estimates of expected costs per dual fuel customer at benchmark consumption, which it gives as 3,100kWh for single rate electricity and 12,000kWh for gas1. For cap period eight, the weighted average expected cost is 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 is approximately £1 for PPM and £3 for non-PPM1. Lower quartile estimates for SVT customers are approximately £0 for PPM and £3 for non-PPM in cap period eight, and approximately £0 for both in cap period nine1.
On implementation, Ofgem proposes that any adjustment would be included in the adjustment allowance (Annex 8) model, applied as a fixed amount over 12 months, with separate adjustments by fuel, payment type and electricity region1. It also proposes a profile of percentage allowances in the Annex 2 model, reverting to the original 1% additional risk allowance from cap period ten onwards1. That allowance is currently worth around £3 per dual fuel customer over the six months of cap period eight, or around £9 annualised1. Ofgem estimates the reduction in switching costs over those six months at roughly £1.90 to £2.70 per dual fuel customer, doubling to around £3.80 to £5.40 annualised1.
"We intend to publish a decision in August 2022, so that, if needed, any changes may come into effect from 1 October 2022 (cap period nine)."
The consultation follows the February 2022 wholesale decision, in which Ofgem concluded that a cap level increase of £61 per customer in cap periods eight and nine was required so suppliers could recover efficient costs related to cap period seven, and set an additional allowance of £12 for electricity shaping and imbalance costs to be recovered across periods eight and nine1. In that decision the cap period seven adjustment was included in the additional risk allowance1.
Why it matters for households
The energy price cap sets the maximum a supplier can charge a household on a default tariff, so any adjustment to it feeds directly into bills. The figures under discussion are per customer allowances within the cap, not final tariff levels, and Ofgem has not decided whether to apply them. The estimates vary sharply by payment type: non-PPM dual fuel customers carry the larger expected figures in cap period eight, while prepayment customers carry much smaller ones. Because the proposed adjustment would run over 12 months as a fixed amount, any change would be spread across cap periods rather than landing in a single six-month window. For a household's energy independence, the practical question is whether the cap continues to reflect the actual cost of supplying default tariff customers, and how the gap between default tariffs and fixed deals changes as a result.
What happens next
Responses to the consultation are due by 14 June 20221. Ofgem intends to publish a decision in August 2022, so that any changes may come into effect from 1 October 2022, the start of cap period nine1. The regulator has said it may decide no adjustment is required1. The regulatory policy context, including how Ofgem handles cap methodology changes, is set out in its published decisions.
Sources1 cited
- Consultation, ofgem.gov.uk