Ofgem has published a consultation setting out its minded-to position of making no adjustment to the energy price cap for wholesale costs incurred between October 2022 and September 2023, covering cap period 9a to 10b1. The document, published on 15 December 2023, follows an update letter on 3 October 2023 that provided revised timings for the wholesale review and sought views on a framework for considering whether an adjustment to the cap is appropriate1. Responses are requested by 17 January 20241.
The review examined whether wholesale costs in that period differed materially and systematically from the allowances built into the cap. Ofgem collected data from 11 suppliers representing 96% of the retail market1. It found a wide variety of wholesale costs relative to allowances, with some suppliers appearing to have experienced costs below the level assumed in the cap and others higher1. Much of the divergence occurred over the two winter cap periods from October 2022 to March 2023, when average temperatures were higher than seasonal norms and the move to a quarterly cap meant suppliers had to adapt their hedging strategies1.
"We conclude that these costs did not systematically differ from the allowances available under the price cap methodology."
The cap was introduced on 1 January 2019 under the Domestic Gas and Electricity (Tariff Cap) Act 2018 and protects existing and future domestic customers on standard variable and default tariffs1. Allowances are set ahead of time, with after-the-fact adjustments made if material and systematic differences between allowances and efficient costs are identified1. Ofgem has previously made such adjustments: one for increased wholesale costs during cap period 7 resulted in a cap level increase of £61 per dual fuel customer at benchmark consumption, and one for cap period 8 resulted in an increase of £411. Benchmark consumption is given as 3,100kWh for single rate electricity and 12,000kWh for gas1.
The consultation also seeks initial views on the scope of future reviews of the enduring wholesale allowances, evaluation of the move to a quarterly price cap, and the implications of market-wide half hour settlement1. It proposes minor technical changes to the structure of the Annex 2 model, to improve transparency of the demand weightings used to inform the backwardation allowance and to account for a change of inputs in the Capacity Market Cost Allowance Methodology1. Ofgem states it has decided not to cover questions on the recovery period for backwardation costs in this consultation1.
Why it matters for households
The energy price cap sets the maximum a supplier can charge domestic customers on default tariffs for each unit of gas and electricity, so any adjustment to it feeds directly into household bills. Ofgem's minded-to position is that no adjustment will be made for the period covered, meaning no change to the cap level on this account1. The two previous adjustments cited by Ofgem each raised the cap level, by £61 and £41 per dual fuel customer at benchmark consumption1.
The review also touches on how the cap is set and reviewed by Ofgem, the regulator responsible for the default tariff cap1. Ofgem notes that ex-post adjustments in either direction risk altering suppliers' incentives, and that downward adjustments could reduce the incentives for suppliers to price below the cap1. It adds that price volatility, one key driver of differences between costs and allowances, has diminished as markets have calmed, and that as supplier financial resilience improves, adjustments are less likely to be in customers' interests1. Ofgem says it does not currently expect the frequency of adjustments seen over the last two years to continue1.
What happens next
Ofgem will consider responses to the consultation, which close on 17 January 20241. If its position on the case for an adjustment remains unchanged, it will publish a decision document in early 2024 confirming that no wholesale cost adjustment will be made1. If it decides not to proceed in line with its minded-to position, it will undertake a new consultation on a different position, and any changes to the price cap would, at the very earliest, be made as part of the update for the July to September 2024 cap period1.
Sources1 cited
- Energy price cap wholesale costs review, ofgem.gov.uk