Ofgem has confirmed technical changes to the model it uses to calculate wholesale cost allowances under the default tariff cap, with both changes taking effect from April 2024, that is from Charge Restriction Period 12a onwards1. The regulator also decided not to make an adjustment to the cap for wholesale costs incurred between October 2022 and September 20231.
The decision, published on 23 February 2024, follows a December 2023 consultation on whether to adjust the cap to account for differences between wholesale costs and allowances over that period1. The review covered cap periods 9a to 10b, October 2022 to September 2023, and followed similar reviews of costs incurred in cap period eight and cap period seven1.
"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."
Ofgem said all supplier responses to the consultation supported not making an adjustment, while a consumer group objected, noting that the analytical approach used had changed compared to previous similar reviews1. The regulator said the change in methodology reflected the specific considerations of the review1. The document reports a range of figures from its analysis of the period, including a weighted average of -£70, a minimum of -£367, a lower quartile of -£168, an upper quartile of £105 and a maximum of £3461.
On the technical changes, Ofgem said it would proceed with incorporating into its Capacity Market Methodology a new measure called "peak relevant demand", which the Low Carbon Contract Company will publish, in anticipation of legislation being in place to facilitate a change to Energy Intensive Industry exemption1. It also confirmed changes to the presentation of demand shares in the model to enhance transparency1.
"We have decided to proceed with the proposed changes to tab '3b Demand'."
The document also records that Ofgem decided to pause the review of additional wholesale allowances and set out its intention to allow the Market Stabilisation Charge to expire at the end of its current extension period in March 20241. It notes that in February 2024 Ofgem 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 expected1.
Why it matters for households
The price cap sets the maximum a supplier can charge a household on a standard variable or default tariff for each unit of gas and electricity, and the standing charge1. Wholesale costs are the largest single contributor to those bills, and the allowances within the cap are generally set ahead of time1. The decision not to adjust the cap for October 2022 to September 2023 means no after-the-fact change to the level of the cap for that period1. The technical changes affect how the model calculates wholesale allowances and how demand shares are presented, rather than the level of the cap itself1. For a household, the practical effect is that the method behind the cap continues to be updated while the allowance for that earlier period stays as it was. The Capacity Market input concerns payments for firm capacity, a cost recovered through bills, and the Ofgem changes sit within the wider price cap framework.
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 take effect from April 2024, from Charge Restriction Period 12a onwards1. The document states that Ofgem set out more detailed proposals in February 2024 for its intended approach to amending the price cap methodology should the relevant legislation not be in place by 1 April as expected1.
Sources1 cited
- Energy price cap wholesale adjustment decision, ofgem.gov.uk