Ofgem introduced a temporary allowance within the energy price cap in April 2024, allowing suppliers to recover debt-related costs incurred between April 2022 and March 2024 that were over and above the existing permanent cap allowances1. The regulator said the temporary allowance would ultimately be replaced by a new enduring allowance for debt-related costs through its operating costs review1.
The allowance was set at £28 per typical dual fuel customer on the cap and implemented in April 2024 for a period of 12 months, which would come to an end in March 2025 without intervention1. A separate Ofgem consultation document gives the figure as 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 20252. The two Ofgem documents give different figures for the allowance.
Ofgem described the mechanism as a "Float & True-up" approach, where an initial Float is set using estimates and reviewed once the latest data is available1. The regulator said its latest data showed aggregated debt-related costs trending downwards from their peak in 2023 but still materially above the level of existing permanent cap allowances1. Its analysis suggested that from April 2024 to September 2024, suppliers had been under-recovering costs by about £195 million under its hybrid benchmark approach1.
Ofgem said total debt and arrears had reached just over £3.8 billion in quarter 3 2024, an increase of around £2 billion since the start of 20221. It said this was a combination of "Debt" where there is a repayment plan in place and "Arrears" where customers do not yet have a debt repayment plan in place1.
"In April 2024 we introduced a temporary allowance within the price cap (the cap)."
The operating costs review covers core operating costs, debt-related costs, smart metering costs and pass-through industry charges2. Ofgem said operating costs account for up to 21% of the overall bill in a given cap period and are spread across three cost components: the operating cost allowance, the payment method uplift and the Smart Meter Net Cost Change2. It said it intended to issue a decision in February 2025, which should allow it to implement any updates to the operating cost allowance in April 20252.
Why it matters for households
Debt-related costs are recovered through the price cap, so an allowance of this kind feeds into the level of the cap rather than appearing as a separate charge on a bill. Ofgem's stated position is that prices should reflect the efficient cost of supplying energy, including the costs of customer debt incurred, much of which relates to supporting customers facing payment difficulty1. The regulator said the extension was intended to smooth the profile of the overall debt allowances within the cap1.
For a household, the practical effect is that a portion of what is paid under the cap reflects costs arising from unpaid bills across the market, not just that household's own consumption. Ofgem said that in most sectors debt-related costs are generally recovered from paying customers, and as such have always been part of the cap1. It also said it had separately consulted on whether there is a case for the introduction of a debt relief scheme to support customers struggling to repay debt built up during the gas crisis1.
The price cap sets a limit on unit rates and standing charges for default tariffs, not a cap on the total bill, so a household using more energy pays more. How the allowance interacts with a particular bill depends on payment method and consumption; the prepayment and direct debit comparison and the explanation of why a bill can be higher than the cap figure set out those mechanics.
What happens next
Ofgem decided to maintain its consultation minded-to position to extend the Float at its current level until the implementation of the operating costs review or until September 2025, whichever is sooner1. The operating costs review was planned to be implemented from July 2025 at the earliest1. Ofgem said it expected to implement the operating cost review later this year and that the extension was intended to bridge the gap as suppliers have continued to incur efficient costs above what is allowed for by the permanent debt-related costs allowance1.
Ofgem received eight responses from industry and one from a consumer advocate1. All industry respondents were in favour of extending the Float; the consumer advocate did not agree with the proposal, saying there was no stipulation for suppliers to use the debt-related costs allowances to clear debt from consumers1.
Sources2 cited
- Energy price cap additional debt-related costs extension decision, ofgem.gov.uk
- Energy Price Cap: Operating cost allowances review, consult.ofgem.gov.uk