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 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. All these values are at the benchmark annual consumption values used to set the cap, 3,100kWh electricity and 12,000kWh gas1.
Ofgem calculated the costs using the lower quartile of the figures received as evidence from suppliers, rather than a weighted average. It said the weighted average cost level should have been £6 per customer higher than it originally calculated, and that it had decided to use a lower quartile benchmark. It also decided not to offset unexpected SVT demand costs against a proportion of the 1% additional risk allowance1.
"We calculated unexpected SVT demand costs using the lower quartile of the figures received as evidence from suppliers. We consider this is the most appropriate benchmarking approach in these circumstances to protect customers."
The decision covers non-prepayment meter customers only. Ofgem said it does not consider an adjustment is justified for PPM customers as the costs are not material for that payment type1. It also decided not to adjust the cap for unexpected SVT costs relating to cap period nine, or for shaping and imbalance costs relating to cap periods eight and nine, saying it did not find evidence of material cost changes relative to the existing cap allowance for shaping and imbalance in cap period eight1.
Separately, Ofgem adjusted its calculation of backwardation costs in cap period seven, October 2021 to March 2022, leading to an uplift of £6 per dual fuel customer. That adjustment takes effect from cap period nine, 1 October 2022, and will be in place for 12 months1. Ofgem said it concluded that a cap level increase of £61 per customer in cap periods eight and nine was required to ensure suppliers could recover their efficient costs related to cap period seven1.
| 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 |
| Combined cap level increase, cap periods eight and nine | £61 |
Ofgem introduced the cap on 1 January 2019, which protects households on standard variable and default tariffs, and sets it with reference to the Domestic Gas and Electricity (Tariff Cap) Act 20181. The adjustment will be a fixed amount, rather than being subject to a subsequent true-up1.
Why it matters for households
The £41 sits inside the cap level that applies to standard variable and default tariffs from 1 October 2022, so it feeds into what a household on a default tariff pays rather than appearing as a separate charge. The split between electricity and gas means the effect is weighted slightly more towards gas at benchmark consumption1.
Ofgem framed the decision as a trade-off between the immediate impact on bills and the risk of supplier failure. It said an allowance intended for efficient costs is in customers' long-term interests, in particular by reducing the risk that customers pay for the mutualised costs of supplier failures, and noted that by December 2021 it had consented to Suppliers of Last Resort making initial levy claims totalling £1.83bn1. It also said it was conscious of the impact on customers already facing severe cost of living pressures1.
For a household's energy independence, the practical point is that the cap level is set from wholesale costs and allowances rather than from a fixed price, and this decision adds a further allowance to it. The lower quartile benchmark means the amount reflects the cheaper end of the cost evidence suppliers submitted, not the average1.
What happens next
The adjustment applies from 1 October 2022 for 12 months, and the £6 backwardation uplift also takes effect from 1 October 2022 for 12 months1. Ofgem said it will not 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, and that it would be up to stakeholders to make the case for any future reviews of these areas1. The document also states that it will implement a quarterly cap update from 1 October 20221.