Ofgem published a consultation on 10 October 2022 on the approach to calculating the wholesale additional risk allowance within the default tariff cap methodology for charge restriction period 9b, covering January to March 20231. The regulator asked stakeholders to send comments to its retail price regulation address by close of business on 24 October 20221.
The allowance currently has two elements: a 1% uncertainty allowance introduced in the original cap design, and an additional percentage uplift equating to £61 to account for unexpected wholesale related costs incurred during cap period 7 (October 2021 to March 2022)1. Ofgem decided in February 2022 to make an adjustment of £61, an increase, to the cap level at benchmark consumption, recovered over 12 months from April 2022 to March 20231. A separate ex-ante backwardation allowance was introduced in the August 2022 decision, calculated by comparing the direct fuel element of the wholesale allowance under the index approach for a given season or quarter with the cost of a nominal supplier buying energy for only that season or quarter1.
Ofgem said it identified, before the period 9a cap announcement, that the backwardation allowance calculation was being incorrectly uplifted by the inflated additional wholesale risk allowance, which would have caused a potential over-recovery1. Its proposed fix separates the allowance into two sub-components1:
| Sub-component | Value applied |
|---|---|
| Direct fuel only | Base 1% risk allowance plus the £61 for period 7 cost recovery |
| Backwardation only | Base 1% risk allowance only |
Ofgem said using the 1% plus £61 value alone would lead to over-recovery for suppliers, while using the 1% value alone would lead to under-recovery, and that a weighted average single figure was not possible because of interactions within the model1.
"In this letter, we are consulting on the approach to calculating the wholesale additional risk allowance within the default tariff cap ('the cap') methodology for the charge restriction period 9b (January, March 2023)."
The energy price cap limits what default tariff customers can be charged for gas and electricity, and Ofgem sets its level to reflect the typical costs to suppliers of supplying that energy plus a fair margin1. The consultation sits within Ofgem's wider regulation and policy work; the regulator's role is set out in our guide to what Ofgem does and what it covers.
Why it matters for households
The allowance is one input into the level of the cap, so how it is calculated feeds into the maximum a household on a default tariff can be charged. Ofgem's stated aim in separating the two values is that consumers do not pay more than the efficient cost benchmark, and that the cap reflects both the February 2022 decision on wholesale volatility and the August 2022 decision introducing the ex-ante backwardation allowance1. The £61 relates to costs already incurred during period 7 rather than recurring costs, and is being recovered across April 2022 to March 20231. For a household, the practical effect is on the size of the cap figure announced for January to March 2023, not on the structure of the tariff itself. The consultation does not set out any change to how a household's bill is calculated beyond the allowance.
What happens next
Responses are due by close of business on 24 October 20221. Ofgem said it will give due regard to representations and, if an alternative approach is more appropriate, will adjust the relevant models for use from cap period 9b1. Absent any further consultation, the additional wholesale risk allowance will revert to its single value of 1% from 1 April 2023 for both the backwardation and direct fuel uplifts1. The letter was signed by Dan Norton, Deputy Director, Retail Price Protection1. The level of the January 2023 cap itself has not been announced.