Ofgem has published more detailed proposals for amending the price cap methodology should the legislation needed for an energy intensive industry (EII) exemption not be in place by 1 April 2024, according to its energy price cap wholesale adjustment decision, published on 23 February 20241. The same document confirms that the regulator will make no adjustment to the cap for wholesale costs incurred between October 2022 and September 20231.
The review compared wholesale costs and allowances over cap periods 9a to 10b, covering October 2022 to September 20231. Ofgem said its conclusion was that costs incurred by suppliers did not systematically differ from allowances over that period, and that all supplier responses to its December 2023 consultation supported not making an adjustment, while a consumer group objected that the analytical approach had changed compared with previous similar reviews1. The figures published alongside the review show a weighted average difference of -£70, a lower quartile of -£168, an upper quartile of £105, a minimum of -£367 and a maximum of £3461.
"In February 2024, we have also set out more detailed proposals15 for our intended approach to amending the price cap methodology, should the relevant legislation not be in place by 1 April as expected."
Ofgem also decided to proceed with technical changes to the Annex 2 wholesale cost allowance model1. These include incorporating a new measure called "peak relevant demand", which the Low Carbon Contract Company will publish, in anticipation of the legislation being in place to facilitate the change to EII exemption, and changes to the presentation of demand shares in the model to enhance transparency1. Ofgem said both changes will take effect from April 2024, from Charge Restriction Period 12a onwards1. It also set out its intention to allow the MSC to expire at the end of its current extension period in March 20241.
The energy price cap was introduced on 1 January 2019 to protect households on standard variable and default tariffs1. Wholesale costs are the largest single contributor to customer bills and are reflected through allowances generally set ahead of time, with after the fact adjustments considered where material and systematic differences are identified1. The review followed similar exercises covering cap period eight (April 2022 to September 2022) and cap period seven (October 2021 to March 2022)1. 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 consultation position that any ex-post adjustment needs to be considered very carefully1.
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 change to the methodology behind it feeds through to what a home pays1. The decision not to adjust for wholesale costs over October 2022 to September 2023 means no after the fact correction to cap levels on that account1. The EII exemption concerns relief from certain levies for energy intensive industries; the contingency proposals matter because they set out how the cap would be calculated if that legislation is not in place by 1 April 20241. For a household, the practical effect is on the standing charges and unit rates that make up a default tariff bill, and therefore on the share of a home's energy spending that is fixed rather than avoidable through lower use. The standing charge element in particular is paid regardless of consumption, which limits how far a household can reduce a bill by cutting use. Ofgem's role in setting and enforcing the cap is set out in its remit as the energy regulator.
What happens next
Ofgem said its current intention is that stakeholder comments 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 spring1. The technical changes to the Annex 2 model take effect from April 20241. Whether the EII exemption legislation is in place by 1 April 2024 had not been confirmed in the document1.
Sources1 cited
- Energy price cap wholesale adjustment decision, ofgem.gov.uk