Ofgem has rescheduled the follow-up consultation in its review of additional wholesale costs in the default tariff cap, moving it from late September to late November or early December, the regulator said in an update published on 3 October 20231. The change means any adjustment to the cap, if Ofgem decides one is appropriate, would be implemented from April 2024 at the earliest rather than January 20241.
The review covers suppliers' wholesale costs for default tariff customers between October 2022 and September 20231. Ofgem said it began the workstream in July and has since sent a Request for Information to all suppliers in scope1. It said the extra time would ensure the analysis and calculations behind any decision are robust, and would allow it to consult suppliers directly on the information they provided1.
"move the implementation date of an adjustment, should we decide that one is appropriate, from January 2024 to April 2024, at the earliest"
Ofgem said its initial analysis of the data suggests that, on average, realised costs may potentially have been lower than the provided allowance over the period from October 2022 to September 20231. It listed possible reasons for costs deviating from allowances, including weather effects, commercial decisions such as hedging strategies, liquidity issues in the wholesale market, and unexpected demand destruction1. The review will also consider the recovery period for backwardation costs, which Ofgem introduced in its August 2022 decision on wholesale methodology changes with a six-month recovery period1.
The regulator set out three principles for deciding whether an adjustment is appropriate: protection of customers, that any adjustment should be appropriate across suppliers, and that it would be more likely to adjust where costs or benefits result from external factors rather than suppliers' commercial choices1. It said the difference between costs and allowances must be material and systematic, with materiality assessed through benchmarking1. Ofgem also said it does not need to set the cap at a level that would ensure all suppliers recover their costs, and that it can only set one cap across the market, covering a notional efficient supplier1.
Ofgem said it has carried out a putback process, giving individual suppliers its analysis of their data, and does not see it as necessary to implement a confidentiality ring in addition to that process1. It invited views on its questions by close of business on Monday 23 October 20231.
Why it matters for households
Wholesale costs account for the largest portion of a customer's bill, according to Ofgem1. The cap is calculated using a core direct fuel allowance, based on forward contracts measured over an observation window, plus additional direct fuel allowances covering shaping and imbalance costs, transaction costs, additional risk and uncertainty set at 1% of direct fuel costs, and unidentified gas and electricity transmission losses1. The additional allowances are indexed as a fixed percentage of direct fuel costs rather than recalculated1.
Any adjustment could move the cap in either direction. Ofgem said it considers adjustments should be symmetrical where practically possible1, and that its initial analysis points to realised costs potentially having been lower than the allowance on average1. A downward adjustment would reduce the wholesale element of the cap; an upward one would raise it. The delay means the level set for the period from January 2024 will not reflect any adjustment from this review, with April 2024 the earliest point at which one could take effect1. The energy price cap is set under the Domestic Gas and Electricity (Tariff Cap) Act 20181, and the price cap history records each level and announcement date.
What happens next
Ofgem is seeking comments on its framework questions by close of business on Monday 23 October 20231. The follow-up consultation is now expected in late November or early December, with any implementation from April 2024 at the earliest1. Ofgem said it will consult again once it has reached a 'minded to' position1.