Ofgem published its decision on the energy price cap operating cost and debt allowances on 23 May 2025, concluding a review that began with a statutory consultation on 12 December 2024 and closed on 7 February 20251. The regulator said it had decided to update the existing operating cost and debt allowances after considering representations from stakeholders, with the new structure implemented from 1 July 20251.
The review is the first holistic look at the allowances for operating costs since the default tariff cap was introduced on 1 January 20192. Operating costs cover the running of a supply business, such as call centres, metering and IT systems, and the costs of customer debt. Ofgem states these costs currently account for around £300 of an annual household bill for a typical dual fuel customer, or about 15% to 20% of the overall customer bill within each price cap period1.
The decision sets the core operating cost allowance using a weighted average benchmark based on 2023 supplier cost data, and sets the debt allowance at £71 per customer per year on average, the bottom of the range consulted on and a £2 increase versus current allowances2. Ofgem also decided to retain the status quo approach to the smart metering net cost change allowance and to set a separate pass-through industry charges allowance2. The consultation had proposed four allowances: core operating cost, debt-related cost, smart metering net cost change, and industry charge1.
The overall impact is an average reduction of £8 per customer in the cap, shown in the table below as the allowances would have been in the April 2025 cap period2.
| 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 received 10 responses from suppliers, 3 from consumer groups and charities, 2 from industry specialists and 1 from an industry body on the structure proposals, and 8 supplier responses plus 1 from a consumer advocate backed by a campaign of individual responses on the additional debt adjustments1. It reported mixed reactions from industry and consumer groups, with industry broadly supportive of the debt proposals while consumer responses raised concern about passing costs on to bills1. The decision includes a small upwards adjustment for the increase in employer National Insurance Contributions implemented from April 20252.
"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."
Why it matters for households
The allowances sit inside the energy price cap, so changes to them feed through to the maximum a supplier can charge a household on a default or standard variable tariff, which Ofgem says protects 22 million such customers2. The average £8 reduction is small against a bill, but the split matters: direct debit customers see a £15 reduction in the allowance while standard credit customers see a £9 increase, and prepayment customers a £3 reduction2. Ofgem says it retained the current differences between direct debit and standard credit customers because it did not consider it would protect default tariff customers as a whole if one group disproportionately bore the costs of the minority in debt2. The decision also confirms Ofgem will not move a further £20 to £100 of costs from standing charges to unit rates1. For a household, the standing charge is the fixed daily amount paid regardless of use, so keeping costs there rather than in unit rates affects how much of a bill is unavoidable. The debt allowance reflects costs already largely paid by customers, and Ofgem says it will keep debt costs under review2.
What happens next
The new allowances are implemented in the July 2025 cap, cap period 14b, and the "float" allowance ends in July 20252. The industry charges allowance set in this decision is in place until October 20252. Ofgem had planned to publish its decision on operating cost allowances in May 2025 and to make updates to operating costs in July 20251. The consultation process that produced the decision is set out on Ofgem's pages, and the regulator's wider role is covered in our guide to Ofgem.