Ofgem published its December 2024 statutory consultation setting out minded-to positions across four new allowances for the energy price cap, the regulator's energy consultations process that precedes a final decision. The consultation followed the regulator's May 2023 signal of its intention to review operating cost allowances "for the first time since the introduction of the cap in 2019"1.
The review covers four distinct components: core operating costs, debt-related costs, industry charges and a component capturing ongoing change in operating costs from the smart meter rollout1. Operating costs cover the running of a supply business, including call centres, metering and IT systems, plus the costs of customers who fall behind on bills. Ofgem states these costs currently account for around £300 of an annual household bill for a typical dual fuel customer1.
The regulator's later decision, published in May 2025, set out the impact of the review as an average reduction of £8 per customer in the cap, with the new allowances implemented in the July 2025 cap period1. The table below shows the total allowance by payment method as it would have applied in the April 2025 cap period1.
| Payment method | Decision values (£ per customer) | Change on current approach (£) |
|---|---|---|
| Direct debit | 280 | -15 |
| Standard Credit | 427 | 9 |
| Prepayment | 288 | -3 |
| Weighted Average | 312 | -8 |
Ofgem decided to set the core operating cost allowance using a weighted average benchmark, based on 2023 supplier cost data, and to set a separate pass-through industry charges allowance1. On debt, the regulator set an allowance of £71 per customer per year, on average, at the bottom of the range consulted on, representing a £2 increase versus current allowances1. Ofgem also decided to retain the status quo approach to setting the smart metering net cost change allowance1.
"The impact of this review is an average reduction of £8 per customer in the cap"
The decision also included a small upwards adjustment for the increase in employer National Insurance Contributions implemented from April 20251. Ofgem stated the allowance set as part of the decision is in place until October 20251.
Why it matters for households
The energy price cap limits what suppliers can charge default tariff and standard variable tariff customers, who Ofgem says number 22 million1. The allowances within the cap determine how much of a household bill reflects the cost of running a supply business and recovering unpaid bills, rather than wholesale energy or network costs. A reduction in the operating cost allowance lowers the amount suppliers can recover through the cap, while an increase raises it. The split by payment method means the effect differs depending on how a household pays: direct debit customers see a £15 reduction, prepayment customers a £3 reduction, and standard credit customers a £9 increase in the April 2025 comparison1. Debt costs are recovered from paying customers, and Ofgem states the alternative would likely mean higher long-run costs through supplier failures1. The regulator has said it will keep debt costs under close review and consider further changes if costs depart from allowances in a systematic and material way1.
What happens next
Ofgem published a decision on the extension to the additional debt-related costs adjustment allowance in February 20251. The new set of allowances was implemented in the July 2025 cap period, and the "float" allowance ended in July 20251. The allowance set as part of the decision is in place until October 20251.