Ofgem published a policy consultation on 12 October 2023 on whether to make a temporary adjustment to the default tariff cap for additional debt-related costs1. The consultation closes on 2 November 20231. It follows the regulator's August 2023 decision to introduce an allowance for additional support credit bad debt costs for 12 months initially from cap period 11a, October to December 20231.
The cap was introduced on 1 January 2019 under the Domestic Gas and Electricity (Tariff Cap) Act 2018, which came into force on 19 July 2018, and protects households on standard variable and default tariffs1. The debt-related costs allowance within the cap covers three cost types: bad debt charge, debt-related administrative costs and associated working capital costs1. Ofgem estimates that for cap period 11a the allowance represents approximately 6% of typical dual fuel standard credit bills, 1% of typical dual fuel direct debit bills and 1% of typical dual fuel prepayment bills1.
Ofgem said current energy debt and arrears total over £2.6bn1. Its review's first two requests for information, covering April 2022 to March 2023, suggested no material under or over-allowance for bad debt and debt administration costs in 2022/23, but it could not consistently assess working capital costs at that time1. Following a third request for information, Ofgem said it has seen evidence of a gap between costs and the existing cap allowance in cap periods 8 to 10a, April 2022 to June 20231. It proposes to include another quarter, cap 10b, in scope, and issued a fourth request for information covering Q3 2023 data in early October1.
In its August 2023 decision on an allowance for additional support credit bad debt costs, Ofgem set a temporary allowance between cap periods 11a and 12b worth £8.77 per typical dual fuel customer1. Ofgem said it will not have actual data on the under or over allowance for debt-related costs in cap periods 11a and 11b until at least the October 2024 price cap1.
"Do you agree that we should make an initial float adjustment in April 2024, followed by a later true-up? Do you agree it should be included within the cap for a 12 month period? Do you agree that this allowance should be temporary only?"
The consultation also asks whether supplier costs arising from the moratorium on involuntary prepayment meter installations should be included in any adjustment1. Ofgem agreed a voluntary moratorium on involuntary prepayment meter installations and smart meter remote mode switches with suppliers in February 20231. It also asks how any allowance should be apportioned between payment methods, and notes that in August 2023 it set out options to levelise prices across payment methods1.
Why it matters for households
The debt-related costs allowance is a component of the price cap, so any adjustment changes the level at which default tariffs are set rather than acting as a separate charge. Ofgem's own estimate puts the existing allowance at about 6% of a typical dual fuel standard credit bill and about 1% for direct debit and prepayment customers in cap period 11a, so the payment method a household uses affects how much of this cost sits in its bill1. The consultation also raises whether costs from the prepayment meter moratorium should be recovered through the cap, which would bear on prepayment customers specifically.
Ofgem states that without adequately funding suppliers for these costs, there is a risk of supplier exits via a supplier of last resort or special administration regime, which would increase costs for all customers1. For a household, the allowance is one of the policy costs and levies recovered through bills, and its size feeds into what a home pays for its energy independent of how much it uses.
What happens next
The consultation is open from 12 October 2023 and the deadline for submitting views is 2 November 20231. Ofgem said it will publish non-confidential responses alongside a decision on next steps1. The proposed float adjustment would take effect in April 2024, followed by a later true-up, with the timing of that true-up among the consultation questions1. Ofgem said it will not have actual data on the under or over allowance for cap periods 11a and 11b until at least the October 2024 price cap1.