Ofgem published a consultation on the operating cost allowances within the default tariff cap on 14 May 2024, with a response deadline of 11:59 pm on 14 June 20241. The review covers core operating costs, debt-related costs, smart metering costs and pass-through industry charges1. Ofgem said it expects to implement any decisions from the review for the April 2025 cap period, and intends to issue a decision in February 20251.
The cap, introduced on 1 January 2019, currently protects 29 million customers on standard variable and default tariffs1. Operating costs account for up to 21% of the overall bill in a given cap period and are spread across three components: the operating cost allowance, the payment method uplift and the Smart Meter Net Cost Change1. Ofgem describes operating costs as the costs suppliers have most control over, and notes they can vary by customer type, so can influence variation in bills between customers1.
On debt specifically, Ofgem said the operating cost allowance is the primary route through which it assesses and captures the costs suppliers incur to manage debt efficiently, and that it has provided a number of separate uplifts for debt-related costs over time1. The consultation document records that a temporary debt-related cost adjustment, described as a "Float", was implemented in April 2024, and that Ofgem introduced a temporary adjustment of £31 to the cap from cap period 12a (April 2024 to June 2024) for 12 months, with the intention of delivering a true-up process in April 2025 alongside this review1. It also states that in its February 2024 levelisation decision, Ofgem said it could potentially consult on the levelisation of Standard Credit and Direct Debit debt-related costs1.
The document sets out that Ofgem considers some of the responses it received to its May 2023 call for input, and that it has followed a hybrid approach in the request for information issued in July 2023, with a second draft request for information issued on 18 April 20241. It also refers to a working paper on benchmarking published in October 2023 and feedback received from suppliers in response1. Ofgem said it set a stringent operating cost benchmark in 2018 at lower quartile minus £5 to focus on customer protection and incentivise suppliers to make efficiency improvements1. The document cites a cost of capital of 12.26% from an EBIT decision1.
"We are consulting on our review of the operating cost allowances in the cap, which includes core operating costs, debt-related costs, smart metering costs and pass-through industry charges."
The consultation also proposes to use the current model to set the allowance between October 2024 and March 2025 without carrying out an update1. Ofgem notes that from October 2022 it changed from six-monthly cap updates to quarterly cap updates, and that in August 2022 it updated SLC 28AD and Annex 2 of the licence conditions to reflect that change1. Responses can be sent to priceprotectionpolicy@ofgem.gov.uk, with Chris McDermott of the Consumer Protection & Retail Markets team named as contact1.
Why it matters for households
The operating cost allowance is one of the building blocks of the energy price cap, so changes to how it is calculated feed through into the default tariffs that most households pay. Because operating costs are the second largest single contributor to the standing charge after network costs, the review also touches on how those costs are recovered, including whether a unit-rate based approach could be more appropriate1. For a household, that distinction matters: a standing-charge based recovery spreads cost across all customers regardless of use, while a unit-rate approach shifts more of it onto energy consumed.
Debt-related costs are the part of the allowance most directly connected to household circumstances. Suppliers recover the cost of managing customer debt through this allowance, and Ofgem has said it wants the review to take a holistic look at the costs of debt suppliers face, so that the allowance represents efficient costs and gives appropriate incentives1. The temporary £31 adjustment and the planned true-up in April 2025 mean the amounts currently reflected in bills are provisional in part1. The consultation also raises the possibility of levelising Standard Credit and Direct Debit debt-related costs, which would affect how costs are shared between payment methods1. Households in debt can find guidance on supplier payment method changes and on complaints and redress through the site's regulation and policy pages.
What happens next
The consultation closes at 11:59 pm on 14 June 20241. Ofgem intends to issue a decision in February 2025, which it says should allow any updates to the operating cost allowance to be implemented in April 20251. It also proposes to set the allowance between October 2024 and March 2025 using the current model without an update1. Ofgem said it will publish non-confidential responses alongside a decision on next steps1.
Sources1 cited
- Energy Price Cap: Operating cost allowances review, consult.ofgem.gov.uk