Ofgem set out its decision on the Contracts for Difference (CfD) allowance methodology in the default tariff cap on 23 June 20221. The decision means the input data behind the allowance is refreshed every quarter, while the process used to calculate it stays the same1.
The CfD allowance sits within the default tariff cap, the legal limit on what suppliers can charge per unit of energy for households on default tariffs1. Ofgem describes the cap as reflecting what it costs to supply energy to homes and as fixing the profit margin a nominal supplier can make in the GB market1.
The CfD decision sits alongside wider changes to how the cap is calculated. Ofgem confirmed it would move from six-monthly to quarterly cap updates, reduce the notice period, and include backwardation costs in the wholesale methodology, to be recovered over six months1. Those changes take effect from 1 October 20221.
"We have decided to proceed with implementing quarterly updates, a reduced notice period and updating the wholesale methodology to include backwardation costs, to be recovered over six months."
The timetable behind the decision runs back through several consultation stages. Ofgem published a call for input on adapting the price cap methodology for resilience in volatile markets on 15 December 2021, a consultation on 4 February 2022, and a statutory consultation on 16 May 20221. The Market Stabilisation Charge came into effect from 14 April 2022, and the cap transitions to the 3-1-12 approach from 6 June 20221.
| Date | Step |
|---|---|
| 15 December 2021 | Call for input on adapting the price cap methodology |
| 4 February 2022 | Consultation published |
| 14 April 2022 | Market Stabilisation Charge came into effect |
| 16 May 2022 | Statutory consultation on wholesale methodology changes |
| 6 June 2022 | Transition to the 3-1-12 approach |
| 23 June 2022 | Decision on the CfD allowance methodology |
| 26 August 2022 | Cap level for period 9a announced |
Ofgem's stated rationale for the wider package is the scale of wholesale price volatility and the risk of supplier failure. It estimates that moving to quarterly updates will reduce volume risk by 74% compared with a six-monthly index1. It also notes that by December 2021 it had consented to suppliers of last resort making initial levy claims totalling £1.83 billion, costs that are mutualised across customers1.
Why it matters for households
The CfD allowance is one component of the default tariff cap, so the frequency with which its input data is refreshed affects how closely the cap tracks current costs. Under quarterly updates, the allowance responds to changing input data four times a year rather than twice, which shortens the gap between the period when costs are observed and the period when the cap level applies.
For a household, the cap sets the maximum unit rate and standing charge on a default tariff, not the total bill, which still depends on how much energy is used1. Ofgem frames the changes as reducing the risk that customers pay more through the mutualised costs of supplier failures, and states that efficient suppliers being unable to recover their costs is the risk it is addressing1. The regulator also acknowledges that the decisions will affect customers already facing severe cost of living pressures, particularly those in vulnerable groups1.
What happens next
Ofgem announced the cap level for period 9a on 26 August 20221. The quarterly updates, reduced notice period and backwardation changes take effect from 1 October 20221. Ofgem states it intends to keep the backwardation recovery period under review and to review its decisions once it has fully transitioned to quarterly updates and enough time has passed to evaluate the impact1.