Ofgem published a consultation on 12 December 2024 proposing to update the structure of the operating cost allowance in the energy price cap and to extend the temporary additional debt adjustments1. The consultation closed on 7 February 20251. Ofgem has since decided to update the existing operating cost and debt allowances, with the new structure to be implemented from 1 July 20251.
Operating costs are a supplier's own costs for retailing energy, such as running call centres and IT, and do not include the cost of buying energy, government social and environmental schemes, or fixing and repairing cables1. They also include costs associated with customer debt, which Ofgem says has risen significantly in recent years1. Ofgem states these costs make up about 15% to 20% of the overall customer bill within each energy price cap period1. The review is the first of the allowances for operating costs since the introduction of the cap in 20191.
Ofgem proposed four allowances: a core operating cost allowance, a debt-related cost allowance, a smart metering net cost change (SMNCC) allowance and an industry charge allowance1. The consultation also covered the true-up of the current adjustment allowance for additional debt-related costs, including a proposal to extend it, and Ofgem's decision not to move a further £20 to £100 of costs from standing charges to unit rates1.
"After careful consideration of representations from stakeholders, we have decided to update the existing operating cost and debt allowances. The new operating cost and debt allowances structure will be implemented from 1 July 2025."
On the temporary debt allowance, Ofgem said that in February 2024 it decided to introduce a temporary 12-month allowance to the price cap for additional debt costs incurred by industry between April 2022 and March 2024, starting 1 April 20241. In February 2025 it decided to extend the current additional debt costs allowance until the implementation of the operating cost review or the end of September 2025, whichever is sooner1.
The consultation drew 10 responses from suppliers, 3 from consumer groups and charities, 2 from industry specialists and 1 from industry bodies1. Ofgem reported mixed reactions from industry and consumer groups to different aspects of the proposals1. The separate proposals on additional debt adjustments drew 8 responses from suppliers and 1 from a consumer advocate backed by a campaign of individual responses; industry was broadly supportive while consumer responses raised concern about passing on costs to energy bills1.
Why it matters for households
The operating cost and debt allowances are the part of the energy price cap that covers what a supplier spends on running its retail business and on customer debt, rather than the wholesale cost of the energy itself. Because Ofgem puts that figure at about 15% to 20% of the overall customer bill in each cap period, changes to the allowance feed through into the level of the cap that a household on a default tariff pays1. The decision not to shift a further £20 to £100 of costs from standing charges to unit rates means those costs stay where they are in the bill structure1. For a household, the practical effect is on the standing charge and unit rate balance rather than on any single line item, and the debt element reflects costs the supplier has already incurred across the industry.
What happens next
Ofgem said it planned to publish a decision on the operating cost allowances in May 2025 and to make updates to the operating costs in July 2025, noting those dates could change depending on feedback1. The new operating cost and debt allowances structure is to be implemented from 1 July 20251. The consultation is part of Ofgem's wider review of pricing reforms, which it describes as work to make sure the energy retail market is investable and resilient and that the price cap continues to protect customers1. The consultation process itself is set out in Ofgem's guidance on how energy consultations work, and the regulator's wider remit is covered in its guide to what Ofgem does.