Ofgem has decided not to adjust the energy price cap to reflect differences between wholesale costs and allowances between October 2022 and September 2023, the regulator said in a decision published on 23 February 20241. The decision follows a consultation opened in December 2023 on whether to make an adjustment to the default tariff cap for that period2.
The review compared wholesale costs incurred by suppliers with the allowances built into the cap for cap periods 9a to 10b, covering October 2022 to September 20232. Ofgem said its conclusion was that costs incurred by suppliers did not systematically differ from allowances over the period, and that all supplier responses to the December 2023 consultation supported not making an adjustment2. A consumer group objected, noting that the analytical approach used had changed compared with previous similar reviews; Ofgem said the change reflected the specific considerations of this review and that the approach used in each review was appropriate to its facts and circumstances2.
"We have decided to make no adjustment to the cap for wholesale costs incurred between October 2022 and September 2023, in line with our consultation position."
Alongside the decision on the cap level, Ofgem said it would make two small changes to the Annex 2 wholesale allowance methodology model1. The decision document states that Ofgem will proceed with incorporating a new measure called "peak relevant demand", which the Low Carbon Contract Company will publish, into its Capacity Market Methodology, in anticipation of legislation being in place to facilitate a change to Energy Intensive Industry exemption, and with changes to the presentation of demand shares in the model to enhance transparency2. Both changes take effect from April 2024, from Charge Restriction Period 12a onwards2.
The document also sets out figures from the review. It lists a weighted average of -£70, a lower quartile of -£168, an upper quartile of £105, a minimum of -£367 and a maximum of £346, with further columns giving weighted average -£89, lower quartile -£144, upper quartile £35, minimum -£311, and a third set giving weighted average £19, lower quartile -£2, upper quartile £69 and minimum -£1672. The document does not label these columns in the quoted text, and the figures are not explained in the material published alongside the decision.
The review followed a call for input in February 2023, an open letter in July 2023, a Request for Information to suppliers in August 2023 and an update letter in October 20232. Ofgem said it also decided to pause the review of the additional wholesale allowances, and set out its intention to allow the MSC to expire at the end of its current extension period in March 20242.
Why it matters for households
The price cap limits what suppliers can charge households on standard variable and default tariffs, 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 to recover or return differences between what suppliers spent on wholesale energy and what the cap allowed for. Ofgem's decision means no such change is being made for October 2022 to September 2023, so the cap levels already set for later periods are not being reopened on this ground. The two model changes affect how the wholesale allowance is calculated from April 2024 onwards, which feeds into future cap levels rather than past ones. Ofgem said most suppliers raised concerns about its approach to ex-post adjustments in general, and downward adjustments in particular, and that it maintains its position that any ex-post adjustment needs to be considered very carefully2.
What happens next
Ofgem said comments from stakeholders on priorities for future reviews of wholesale allowances and methodologies will help inform an update to the Price Cap Programme of Work to be published in spring2. It also said that in February 2024 it set out more detailed proposals for its intended approach to amending the price cap methodology should the relevant legislation not be in place by 1 April as expected2. The two Annex 2 changes take effect from April 20242.
Sources2 cited
- Energy price cap additional wholesale costs decision | Ofgem, ofgem.gov.uk
- Energy price cap wholesale adjustment decision, ofgem.gov.uk