Ofgem has concluded a review of the operating cost and debt allowances within the default tariff cap, the first holistic look at these allowances since the cap was introduced on 1 January 20191. The decision was published on 23 May 2025 and the new allowances take effect in the July 2025 cap period1.
The cap protects 22 million default tariff and standard variable tariff customers1. Operating costs cover the running of a supply business, such as call centres, metering and IT systems, plus the costs of customers who fall behind on bills. Ofgem states these costs currently account for around £300 of an annual household bill for a typical dual fuel customer1. The review produces an average reduction of £8 per customer in the cap, with the effect varying by how a household pays1.
| Payment method | Decision value (£ per customer, April 2025 cap prices) | Change on current approach |
|---|---|---|
| Direct debit | 280 | -15 |
| Standard credit | 427 | 9 |
| Prepayment | 288 | -3 |
| Weighted average | 312 | -8 |
Notes: dual fuel, benchmark consumption of 3,100 kWh electricity and 12,000 kWh gas; weighted average calculated using January 2025 standard variable tariff customer numbers1.
Ofgem signalled the review in May 2023, followed with a statutory consultation in December 2024, and published a decision in February 2025 on extending the additional debt-related costs adjustment allowance1. The core operating cost allowance is now set using a weighted average benchmark on 2023 supplier cost data, with costs allocated across payment methods before levelling1. Ofgem also included a small upwards adjustment for the increase in employer National Insurance Contributions implemented from April 20251. The debt allowance is set at £71 per customer per year, on average, at the bottom of the range consulted on, which Ofgem says represents a £2 increase versus current allowances1. The "float" allowance ends in July 2025, and the allowance set in this decision is in place until October 20251.
"In May 2023 we signalled our intention to holistically review the allowances for operating costs for the first time since the introduction of the cap in 2019"
Why it matters for households
The allowances are the part of the price cap that covers what it costs a supplier to run its business and to absorb unpaid bills, rather than wholesale energy, network or policy costs. A lower total allowance means less of a household's bill is attributed to these running costs, though the effect differs by payment method: direct debit customers see the largest reduction, standard credit customers see an increase, and prepayment customers a small reduction1. Because the debt allowance is set as a percentage of the cap level, it will vary over time with overall bill size1. Ofgem says it will keep debt costs under close review and consider further changes if costs depart from allowances in a systematic and material way1. For a household's energy independence, the size of these allowances affects how much of a bill is fixed by regulation rather than by how much energy is used, which interacts with the balance between standing charges and unit rates.
What happens next
The new set of allowances is implemented in the July 2025 cap, cap period 14b1. The allowance set in this decision is in place until October 20251.