Ofgem announced the default tariff cap level for charge restriction period 9a, covering 1 October to 31 December 2022, on 26 August 2022. In a consultation published on 10 October 2022, the regulator set out the approach it had applied to the wholesale additional risk allowance within the cap methodology, and asked stakeholders for comment on using it again for period 9b, January to March 20231.
The additional wholesale risk allowance normally sits at 1% of direct fuel costs. Separately, Ofgem decided in February 2022 to add £61 to the cap level at benchmark consumption, to recover costs suppliers incurred during cap period 7, October 2021 to March 2022, spread over twelve months from April 2022 to March 2023. In its August 2022 decision it introduced an ex-ante backwardation allowance, calculated by comparing the direct fuel element of the wholesale allowance under the index approach with the cost of a nominal supplier buying energy for only that season or quarter1.
Before the 9a announcement, Ofgem identified that the backwardation allowance was being incorrectly uplifted by the inflated additional wholesale risk allowance, which would have caused a potential over-recovery. To avoid that, it separated the allowance into two sub-components: a direct fuel value taking the base 1% plus the £61, and a backwardation value taking the base 1% only. Using the 1% plus £61 value alone would have led to over-recovery, Ofgem said, while using 1% alone would have led to under-recovery, and the interactions within the model ruled out a weighted average single figure1.
"Ofgem decided to increase cap level increase of £61 to account for additional costs incurred by industry due to unprecedented wholesale market volatility."
The regulator said the separation ensures the cap reflects the efficient backwardation costs faced by suppliers and does not materially depart from an efficient level of costs, and that the approach was taken so consumers did not pay more than the efficient cost benchmark1.
| Allowance component | Value applied for period 9a |
|---|---|
| Direct fuel only | Base 1% plus £61 uplift |
| Backwardation only | Base 1% |
Why it matters for households
The cap limits what default tariff customers can be charged for their gas and electricity, and Ofgem sets it to reflect the typical costs of supplying that energy plus a fair margin1. The split described here is a technical correction to how one allowance feeds into the model. Its practical effect is to remove a potential over-recovery from the October to December 2022 level, so the cap for that quarter reflects the efficient cost benchmark rather than an inflated one. The £61 uplift itself is a recovery of costs already incurred during period 7, not a recurring cost, and it runs only to March 20231. For a household, the level set for the quarter is what governs the maximum unit rates and standing charges on a default tariff; the history of cap levels and announcement dates sets the 9a figure in context.
What happens next
The consultation asked for responses by close of business on 24 October 2022, ahead of the January 2023 cap announcement1. Ofgem said the need to split the allowance into two sub-components exists only for the remainder of period nine, and that it was consulting on changes until the end of period 9b only. Absent further consultation, the additional wholesale risk allowance reverts to its single value of 1% from 1 April 2023 for both the backwardation and direct fuel uplifts1. If the decision is that an alternative approach is more appropriate, Ofgem said it would adjust the relevant models for use from period 9b1.