Ofgem published a consultation on 15 December 2023 setting out a minded-to position of making no adjustment to the energy price cap for wholesale costs incurred between October 2022 and September 2023, a span it labels cap period 9a to 10b1. The regulator is seeking views on that position, with a response deadline of 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 outcomes: some suppliers appear to have experienced costs below the level assumed in the cap, while others experienced higher costs1. 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 where material and systematic differences between allowances and efficient costs are identified1. Ofgem made such adjustments for cap period 7, which raised the cap level by £61 per dual fuel customer at benchmark consumption, and for cap period 8, which raised it by £411. Benchmark consumption is 3,100kWh for single rate electricity and 12,000kWh for gas1.
The consultation also covers minor technical changes to the structure of the Annex 2 wholesale cost allowance 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 has decided not to cover questions on the recovery period for backwardation costs in this consultation, and will include that in medium-term plans to review the enduring wholesale cost allowances1.
Why it matters for households
The price cap sets the maximum a supplier can charge a household on a default tariff for each unit of gas and electricity, so any adjustment to it flows through to bills. A decision not to adjust means no change to cap levels arising from this review. The consultation notes that during the process some stakeholders raised concerns about the prospect of an ex-post downward adjustment to the cap, and that Ofgem agrees different considerations apply to downward adjustments compared to upward ones1. It states that suppliers can choose to price below the cap, and that ex-post downward adjustments could reduce the incentives for suppliers to do this1. For a household, the practical effect is that the wholesale element of the cap for that period stands as set, and the wider question of how wholesale costs feed into energy bills and energy independence remains a matter of how the cap is calculated rather than of any rebate or charge under this review.
What happens next
If Ofgem's position is unchanged after considering responses, 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 consult again on a different position, and any changes to the cap would, at the earliest, be made as part of the update for the July to September 2024 cap period1. Responses are due by 17 January 20241.
Sources1 cited
- Energy price cap wholesale costs review, ofgem.gov.uk