Ofgem has decided to introduce an adjustment to the default tariff cap for the costs of unexpected Standard Variable Tariff demand relating to cap period eight, April to September 2022. The adjustment takes effect from 1 October 2022 and runs for 12 months1. The decision, published on 4 August 2022, follows a May 2022 consultation on whether suppliers were incurring additional efficient wholesale costs1.
The adjustment is worth £41 per typical dual fuel non-prepayment customer at cap benchmark consumption, comprising approximately £17 per typical electricity customer and approximately £24 per typical gas customer. These values are at the benchmark annual consumption used to set the cap, 3,100kWh of electricity and 12,000kWh of gas1. Ofgem calculated the costs using the lower quartile of figures received as evidence from suppliers, which it said was the most appropriate benchmarking approach in the circumstances1. No adjustment is being made for prepayment meter customers, because Ofgem does not consider the costs material for that payment type1.
Ofgem also decided against several offsets that had been proposed in May 2022. It did not offset the unexpected SVT demand costs against a proportion of the 1% additional risk allowance, and it did not offset them against other changes to costs arising from higher wholesale prices, saying it did not have sufficient confidence to do so1. The decision document states that the adjustment will be a fixed amount rather than subject to a subsequent true-up1.
Separately, Ofgem adjusted its calculation of backwardation costs for cap period seven, October 2021 to March 2022, producing an uplift of £6 per dual fuel customer, applied from 1 October 2022 for 12 months1. It concluded that a cap level increase of £61 per customer across cap periods eight and nine was required to ensure suppliers could recover efficient costs related to cap period seven1. Ofgem also decided not to introduce an adjustment for unexpected SVT costs relating to cap period nine, or for shaping and imbalance costs relating to cap periods eight and nine, finding no evidence of material cost changes for shaping and imbalance in cap period eight1.
"We have decided not to offset unexpected SVT demand costs against a proportion of the 1% additional risk allowance"
| Item | Value |
|---|---|
| Unexpected SVT demand adjustment, typical dual fuel non-PPM customer | £41 |
| Of which electricity | £17 |
| Of which gas | £24 |
| Cap period seven backwardation uplift, dual fuel customer | £6 |
| Cap level increase required across cap periods eight and nine for cap period seven costs | £61 |
Why it matters for households
The £41 adjustment is a cost allowance inside the energy price cap, not a standalone charge, so it feeds into the cap level that applies to default tariffs from 1 October 2022. Ofgem's stated reason for allowing it is that an allowance intended for efficient costs should reduce the risk that households pay for the mutualised costs of supplier failures. As an illustration of that risk, Ofgem said that by December 2021 it had consented to Suppliers of Last Resort making initial levy claims totalling £1.83bn1. The decision document notes the impact on customers already facing severe cost of living pressures, including some of the most vulnerable and disengaged, and states that Ofgem's assessment is that making the adjustment is still in their interests1. Prepayment meter customers do not carry this adjustment, which Ofgem describes as helping a group more likely on average to be in vulnerable situations1. The regulator's role in setting and adjusting the cap is set out under the Domestic Gas and Electricity (Tariff Cap) Act 2018, which Ofgem cites as the basis for the cap introduced on 1 January 20191.
What happens next
The unexpected SVT demand adjustment and the £6 backwardation uplift both take effect from 1 October 2022 and remain in place for 12 months1. Ofgem states that it will implement a quarterly cap update from 1 October 20221. It has not introduced adjustments for cap period nine unexpected SVT costs or for shaping and imbalance costs in cap periods eight and nine, and says it would be up to stakeholders to make the case for any future reviews of these areas1. Further detail on the wider framework sits in the regulation and policy area.