Ofgem has confirmed that the additional wholesale risk allowance within the default tariff cap will revert to its single value of 1% from 1 April 2023 for both the backwardation and direct fuel uplifts1. The change follows a consultation published on 10 October 2022 on the approach to calculating the allowance for charge restriction period 9b, covering January to March 20231.
The allowance had been split into two sub-components for the remainder of period nine. One value inflated direct fuel costs at 1% plus the £61 uplift decided in February 2022 to recover costs incurred during cap period 7, running from October 2021 to March 2022. A separate value inflated the ex-ante backwardation allowance at 1% only, in line with the August 2022 decision that introduced backwardation into the wholesale methodology1.
The split was needed because the original Annex 2 table allowed the additional wholesale risk allowance to be set as a single percentage value. Applying the 1% plus £61 figure to both uplifts would have led to over-recovery for suppliers, while using 1% alone would have led to under-recovery. Ofgem said a weighted average single figure was not possible because of interactions within the model1.
"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 uplifts."
The £61 adjustment was decided in February 2022 to account for additional costs incurred by industry due to unprecedented wholesale market volatility, and was to be recovered over 12 months from April 2022 to March 2023, covering cap periods eight and nine1. Ofgem said the separation of the allowance ensured the cap reflected the efficient backwardation costs faced by suppliers and did not materially depart from an efficient level of costs1.
| Element | Period 9a and 9b treatment | From 1 April 2023 |
|---|---|---|
| Direct fuel uplift | 1% plus £61 | 1% |
| Backwardation uplift | 1% only | 1% |
The default tariff cap limits the amount default tariff customers can be charged for gas and electricity, and is set to reflect the typical costs to suppliers of supplying energy plus a fair margin1. The consultation ran until 24 October 2022, with responses invited by email to Ofgem's retail price regulation team1.
Why it matters for households
The additional wholesale risk allowance is one of several inputs that feed into the energy price cap and therefore into the unit rates and standing charges that default tariff households pay. The £61 uplift was a temporary recovery of costs already incurred by suppliers during the wholesale volatility of late 2021 and early 2022, not a recurring cost. Its removal from the backwardation calculation, and the return to a single 1% value across both uplifts from April 2023, means the cap no longer carries that temporary element. For a household on a default tariff, this affects the cost benchmark underlying the cap rather than the final cap level, which also depends on wholesale prices and other allowances. The change is a technical correction to how the cap is calculated, intended to keep it close to an efficient cost benchmark, and it does not by itself determine what a household pays.
What happens next
The consultation closed on 24 October 20221. Ofgem said it would give due regard to all representations and, if an alternative approach were more appropriate, would adjust the relevant models for use from cap period 9b1. The reversion to a single 1% value takes effect from 1 April 2023 unless a further consultation is held1.