Ofgem moves default tariff cap to quarterly updates

Ofgem decided in August 2022 that the default tariff cap would be updated quarterly rather than every six months¹. The regulator set out the change in its decision on changes to the wholesale methodology, and the first cap level published under the new rhythm covered the three months from 1 October to 31 December 2022¹.

The cap level for that period rose to £3,549 for a dual fuel, direct debit customer, an increase of 80% since the previous update¹. Ofgem attributed the rise mainly to wholesale costs, which increased by £1,391, citing the invasion of Ukraine by Russia and the reductions in Russian gas flows to Europe¹. A separate adjustment of £46 per customer per year was allowed for unexpected standard variable tariff demand costs incurred in cap period eight, and backwardation costs added £143 per customer per year¹.

The next quarterly update, published on 24 November 2022, set the cap for 1 January to 31 March 2023 at £4,279, up 21%². Ofgem noted that the Government's Energy Price Guarantee, which came into effect on 1 October 2022, limited a typical dual fuel direct debit bill to £2,500 until 31 March 2023, and that the figures in its letter represented the cap level, not what consumers would pay². The cap then fell by 23% to £3,280 for 1 April to 30 June 2023, with the wholesale cost allowance dropping from £3,137 to £2,170³.

Rates differed by payment method. The table below shows the dual fuel cap levels Ofgem published for each period.

Source: Ofgem default tariff cap update letters¹.

Ofgem stated the reason for the change in its later letters:

"In August 2022, Ofgem decided the Default Tariff Cap will be updated on a quarterly basis rather than every six months."

The cap sets maximum prices, not maximum bills, and the amount an individual household pays varies with usage, location and payment method¹. Ofgem does not set a single dual fuel cap; caps are set for each fuel separately, and the dual fuel figure is the combined effect of the gas and electricity caps at typical consumption¹.

Why it matters for households

Moving to quarterly updates means the ceiling on default tariff unit rates is recalculated four times a year rather than twice, so changes in wholesale costs reach household prices sooner, in both directions. The three updates above show that in practice: a large rise for October 2022, a further rise for January 2023, then a fall for April 2023 as wholesale allowances dropped¹.

For a household's energy independence, the cap is a limit on the unit price of a standard variable or default tariff, not a fixed bill. A household using less than the typical consumption values Ofgem uses to express the cap will pay less than the headline figure, and one using more will pay more¹. The payment method also matters: standard credit and prepayment customers faced higher cap levels than direct debit customers in all three periods¹. The cap level does not depend on which supplier a customer uses¹.

The Energy Price Guarantee sat alongside the cap from 1 October 2022, reducing unit costs so that a typical dual fuel direct debit bill reached a target level, first £2,500 and then, from 1 April 2023, £3,000, extended until April 2024². Where the guarantee applied, it, not the cap, determined what households paid².

What happens next

Ofgem said in October 2023 that it was reviewing suppliers' wholesale costs for default tariff customers between October 2022 and September 2023, and had rescheduled its follow-up consultation from late September to late November or early December 2023⁴. That rescheduling moved the implementation date of any adjustment, if one were judged appropriate, from January 2024 to April 2024 at the earliest⁴. Ofgem said its initial analysis suggested realised costs may potentially have been lower than the allowance over that period, and that any adjustment would need to be material and systematic⁴.

Sources4 cited

1. Default tariff cap update from 1 October 2021, ofgem.gov.uk
2. Default Tariff Cap update, ofgem.gov.uk
3. Default Tariff Cap update, ofgem.gov.uk
4. Review of additional wholesale costs in the default tariff cap - update, ofgem.gov.uk