Ofgem published a consultation on 16 May 2022 seeking views and evidence on whether domestic energy suppliers are incurring additional efficient wholesale costs beyond the allowances already built into the default tariff cap, for cap periods eight and nine. The regulator said it does not currently have a minded to position on whether an adjustment is required, and set a response deadline of 14 June 2022.
The cap, introduced on 1 January 2019, limits what households on standard variable and default tariffs pay. Ofgem said wholesale prices reached record highs in winter 2021, followed by further increases and volatile conditions in spring 2022, creating potential extra costs in two areas: unexpected standard variable tariff (SVT) demand costs, where more customers than expected move to or remain on SVTs and suppliers must buy additional energy above the cap wholesale allowance; and shaping and imbalance costs from refining hedged positions close to the time of consumption.
Ofgem said the area with the most, though still inconclusive, evidence of material additional costs is unexpected SVT demand costs for cap period eight, making it the main subject of the consultation. It said there is not currently sufficient evidence of material additional costs in shaping and imbalance costs for cap period eight, or in either cost area for cap period nine.
The consultation sets out estimated costs per dual fuel customer at benchmark consumption of 3,100kWh for single rate electricity and 12,000kWh for gas. For cap period eight, the weighted average expected cost is approximately £8 for prepayment meters and £42 for non-PPM, split as follows.
| Cost area | PPM | Non-PPM |
|---|---|---|
| Gas | £5 | £23 |
| Electricity | £3 | £19 |
| Dual fuel | £8 | £42 |
For cap period nine, the weighted average expected cost per dual fuel customer is approximately £1 for PPM and £3 for non-PPM. Lower quartile estimates for cap period eight are approximately £0 for PPM and £3 for non-PPM, and for cap period nine approximately £0 for both.
Ofgem also described offsets. It said the 1% additional risk allowance is currently worth around £3 per dual fuel customer over the six months of cap period eight, or around £9 annualised, and that the reduction in switching costs over the same period could be roughly £1.90 to £2.70 per dual fuel customer, doubling to around £3.80 to £5.40 annualised. It said the weighted average expected cost per dual fuel customer at benchmark consumption for cap period eight is approximately £22 for PPM and £17 for non-PPM in a further area.
"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)."
Ofgem said any adjustment would be applied over a 12-month period and included in the adjustment allowance. It said it proposes to create a profile of percentage allowances in the Annex 2 model, reverting to the original 1% additional risk allowance from cap period ten onwards. In the February 2022 wholesale decision, it included the adjustment for cap period seven in the additional risk allowance, having concluded that a cap level increase of £61 per customer in cap periods eight and nine was required to ensure suppliers could recover efficient costs related to cap period seven. It also decided to set an additional allowance of £12 for electricity shaping and imbalance costs, recovered across cap periods eight and nine.
Why it matters for households
The default tariff cap sets the maximum a supplier can charge households on standard variable and default tariffs, so any change to its allowances feeds through to what those households pay. This consultation concerns costs suppliers may already be carrying, not a new charge, and Ofgem has not decided whether to adjust the cap. If it does, the change would take effect from 1 October 2022, the start of cap period nine, and would be spread over 12 months. The figures above are per-customer estimates at benchmark consumption, not confirmed bill changes, and the outcome depends on evidence submitted and on wholesale prices, which Ofgem described as uncertain. Households on prepayment meters face different estimated costs from those paying by other means, as the table shows. The price cap history records how levels have moved since 2019.
What happens next
Responses and supporting evidence are due by 14 June 2022, submitted by email to Ofgem's Retail Price Regulation team. Ofgem said it will publish non-confidential responses on its website. It intends to publish a decision in August 2022, so that any changes may come into effect from 1 October 2022. Ofgem said it is addressing future backwardation costs separately through its statutory consultation on changes to the wholesale methodology.
Sources1 cited
- Consultation, ofgem.gov.uk