Ofgem consulted on 15 December 2023 on whether to adjust the default tariff cap to account for differences between wholesale costs and allowances between October 2022 and September 2023, and on technical changes to the Annex 2 wholesale cost allowance model1. The consultation set out a minded-to position of making no adjustment, with responses requested by 17 January 20241.
The review covered cap periods 9a to 10b, October 2022 to September 20231. Ofgem collected data from 11 suppliers representing 96% of the retail market, and concluded that wholesale costs over the period did not systematically differ from the allowances available under the price cap methodology1. The consultation said some suppliers appeared to have experienced costs below the level assumed in the cap while others experienced higher costs, and that much of the divergence occurred over the two winter cap periods from October 2022 to March 20231. Ofgem attributed the variation principally to suppliers' own choices about managing competing risks, rather than to systematic factors outside their control1.
The consultation also sought early views on future reviews of the enduring wholesale allowances, evaluation of the move to a quarterly price cap, and the implications of market-wide half hour settlement for wholesale allowances1. It proposed 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 said it had decided not to cover questions on the recovery period for backwardation costs in this consultation, and that the choice of recovery period would instead form part of its medium-term plans to review the enduring wholesale cost allowances1.
The consultation followed earlier steps in the review: a February 2023 call for input, a July 2023 open letter setting out the case and scope, a final Request for Information sent to suppliers on 4 August 2023, and an October 2023 update letter with a calculation putback process1. Ofgem noted that in its February 2022 wholesale decision it made an adjustment for increased wholesale costs during cap period 7, resulting in a cap level increase of £61 per dual fuel customer at benchmark consumption, and that in its August 2022 decision it made an adjustment for cap period 8, resulting in an increase of £41 per dual fuel customer1. Benchmark consumption is given as 3,100kWh for single rate electricity and 12,000kWh for gas1.
"We are seeking views on our minded-to position of making no adjustment to the price cap for wholesale costs incurred between October 2022 and September 2023."
Why it matters for households
The price cap sets the maximum a supplier can charge a household on a standard variable or default tariff, and wholesale costs are the largest single contributor to those bills2. An ex-post adjustment would have changed cap levels after the period in question, so the decision on whether to adjust determines whether households on default tariffs pay for any gap between what suppliers actually spent on wholesale energy and what the cap assumed they would spend. Ofgem's minded-to position was that no such gap was systematic, so no adjustment was proposed1.
The consultation also touched on the direction of any adjustment. Ofgem said different considerations apply to downward adjustments compared to upward adjustments, and that ex-post downward adjustments could reduce suppliers' incentives to price below the cap, with potential impacts on customers and competition1. It added that it did not currently expect the frequency of adjustments seen over the last two years to continue, citing diminished price volatility and improving supplier financial resilience1.
What happens next
Ofgem said that if its position on the case for an adjustment remained unchanged after considering responses, it would publish a short decision document in early 2024 confirming that no wholesale cost adjustment would be made1. If it decided not to make a decision in line with its minded-to position, it said it would undertake a new consultation on a different minded-to position, and that 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.
Sources2 cited
- Energy price cap wholesale costs review, ofgem.gov.uk
- Energy price cap wholesale adjustment decision, ofgem.gov.uk