Ofgem said in its February 2024 levelisation decision that it could potentially consult on the levelisation of Standard Credit and Direct Debit debt-related costs1. The statement appears in a consultation published on 14 May 2024 covering the operating cost allowances within the default tariff cap, which sets out options across core operating costs, debt-related costs, smart metering costs and pass-through industry charges1.
The consultation closes at 11:59pm on 14 June 2024, with responses invited from consumer groups and charities, energy suppliers and industry bodies, as well as other stakeholders and the public1. Ofgem said it intends to issue a decision in February 2025, which should allow it to implement any updates to the operating cost allowance in April 20251. It expects to implement any decisions from the review for the April 2025 cap period1.
Operating costs account for up to 21% of the overall bill in a given cap period and are spread across three components: the operating cost allowance, which reflects the costs of serving a Direct Debit customer; the payment method uplift, which accounts for the additional costs of serving Standard Credit and prepayment meter customers; and the Smart Meter Net Cost Change1. Ofgem said operating costs are a key area of the cap because they are the costs suppliers have most control over, and because they can vary by customer type, so can influence variation in bills between customers1.
On debt specifically, Ofgem said the operating cost allowance is the primary route through which it assesses and captures the costs suppliers incur to manage debt efficiently, and that it has provided a number of separate uplifts for debt-related costs over time1. It introduced a temporary adjustment of £31 to the cap from cap period 12a (April 2024 to June 2024) for 12 months, with the intention of delivering a true-up process in April 2025 alongside this review1. The consultation describes this as the temporary debt-related cost adjustment "Float" implemented in April 20241.
"In our February 2024 levelisation decision, we said we could potentially consult on the levelisation of Standard Credit and Direct Debit debt-related costs"
The review sits alongside other Ofgem workstreams, including a call for input on standing charges, a call for input on affordability and debt in the domestic retail market, and a discussion paper on future price protection1. Ofgem said operating costs are the second largest single contributor to the standing charge after network costs, and that it wants to explore whether these costs continue to be appropriately allocated to the standing charge or whether a unit-rate based approach could be more appropriate1. It also said there may be trade-offs across workstreams around the allocation of costs and benefits between different groups of customers1.
Why it matters for households
The price cap limits what suppliers can charge default tariff customers, and it currently protects 29 million customers on standard variable and default tariffs1. The operating cost allowance is built into that limit, so how Ofgem sets it feeds through to the standing charge and unit rates households pay. Debt-related costs are recovered through bills, which means the treatment of debt affects the level of the cap and how costs are shared between customers on different payment methods.
The levelisation question is about whether the debt costs associated with Standard Credit and Direct Debit customers should be spread differently across those groups. Ofgem has not said it will consult, only that it could potentially do so1. How costs are allocated between payment methods matters for a household's energy bills and energy independence, because the payment method a household uses already changes what it pays under the cap, as set out in the price cap rates by payment method. The difference between standard credit and direct debit and between prepayment and direct debit is set through the payment method uplift, one of the three components Ofgem is reviewing1.
Debt sits on both sides of the household picture. Suppliers recover the cost of unpaid bills through the allowance, while households in arrears face their own pressures, including direct debit increases and credit balances built up through monthly payments. Ofgem's separate call for input on debt and affordability states that debt must be managed in a compassionate and sustainable way1.
What happens next
The consultation closes at 11:59pm on 14 June 20241. Ofgem intends to issue a decision in February 2025, which should allow it to implement any updates to the operating cost allowance in April 20251. It also proposes to use the current model to set the allowance between October 2024 and March 2025 without carrying out an update1. Whether a consultation on levelisation of Standard Credit and Direct Debit debt-related costs will take place has not been reported.
Sources1 cited
- Energy Price Cap: Operating cost allowances review, consult.ofgem.gov.uk