Ofgem has decided to change the way the Contracts for Difference (CfD) allowance is calculated in the default tariff cap, removing the £0/MWh floor that applied to the Interim Levy Rate (ILR) and replacing it with an expected levy payment based on Low Carbon Contracts Company (LCCC) forecasts and expected energy demand1. The decision was published on 23 June 2022, following an April 2022 consultation, and the new methodology applies from 1 October 2022 onwards1.
The cap, introduced on 1 January 2019, 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 value1. The ILR is the unit cost chargeable as a £/MWh rate on eligible demand daily, invoiced daily and based on a supplier's gross eligible demand, and it is set quarterly three months in advance1. Under the CfD regulations, LCCC cannot set an ILR below £0/MWh, a floor intended to ensure it does not pay suppliers in advance and holds sufficient funds for the scheme1.
For cap period nine, LCCC forecast negative payments from suppliers as wholesale prices rose, implying a negative ILR, but the floor meant the cap methodology would not reflect those negative CfD costs1. In the April 2022 consultation, Ofgem forecast that amending the methodology would make the cap £12.51 per customer lower for cap period nine; using LCCC's updated Q2 2022 forecast of 12 May, it recalculated the benefit as £11.44 per customer1. Ofgem also confirmed that generator delays would result in a £2.5 to £4 per customer additional cost impact in cap period eight1. Benchmark consumption values of 3.1MWh per customer per year are applied1.
"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 received responses from five suppliers to the April 2022 consultation; all agreed the methodology should be changed to be more cost-reflective, with the main concern being whether a reconciliation mechanism should be introduced1. Ofgem concluded the issues raised were not resulting in material and systematic impacts and that a reconciliation was not appropriate1.
Why it matters for households
The CfD allowance is one of the levies and obligations built into the energy price cap, so the method used to set it feeds directly into the default tariff level that governs what households on standard variable tariffs pay. Removing the £0/MWh floor means the allowance can now be negative when wholesale prices are high enough that CfD generators pay back rather than receive support, allowing that benefit to be passed through into the cap rather than being blocked at zero. Ofgem's own estimate puts the effect at £11.44 per customer for cap period nine, against £12.51 forecast in April1. The decision covers methodology only and does not set the allowance value itself1. For a household's energy independence, the change affects the levy component of a default tariff rather than the wholesale energy or network components, and it applies to suppliers' costs under the Contracts for Difference scheme, which is the government's main mechanism for supporting low-carbon electricity generation1.
What happens next
The new methodology applies from 1 October 2022 onwards1. A decision on how frequently the allowance will be updated will be taken following feedback on Ofgem's statutory consultation on changes to the wholesale methodology1. The document does not set the value of the CfD allowance1.