Ofgem has decided to retain its existing approach to setting the operating cost and debt allowances within the default tariff cap, the regulator said in a decision published on 23 May 2025. The review, the first holistic look at operating cost allowances since the cap was introduced on 1 January 2019, changes the cost data used and removes one element of prepayment meter costs. The overall effect is an average reduction of £8 per customer in the cap1.
The cap, introduced under the Domestic Gas and Electricity (Tariff Cap) Act 2018, protects 22 million default tariff and standard variable tariff customers. 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 says these costs currently account for around £300 of an annual household bill for a typical dual fuel customer1.
The decision sets the core operating cost allowance using a weighted average benchmark based on 2023 supplier cost data, replacing the 2017 baseline. Ofgem has also included a small upwards adjustment for the increase in employer National Insurance Contributions implemented from April 2025, and has set a separate pass-through allowance for industry charges. The debt allowance is set at £71 per customer per year, on average, which Ofgem says represents a £2 increase versus current allowances1.
The table below shows the total allowance by payment method, expressed in April 2025 cap prices for a dual fuel customer using benchmark consumption of 3,100 kWh of electricity and 12,000 kWh of gas1.
| 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 said it had decided to lower the threshold for including suppliers in its sample when allocating costs between payment methods, which it says reduces the risk of under-recovery for a notional efficient prepayment supplier. It also confirmed the removal of the prepayment meter cost offset, describing it as the "float" allowance that will be ending in July 20251.
"Overall, we have decided to retain the status quo approach to setting the SMNCC"
The new set of allowances will be implemented in the July 2025 cap, cap period 14b. The allowance set as part of this decision is in place until October 20251.
Why it matters for households
The allowances sit inside the energy price cap, which limits what suppliers can charge customers on default and standard variable tariffs. A reduction in the allowance feeds through to the cap level, so the £8 average reduction affects the maximum a household on those tariffs can be charged, though the final bill depends on usage and payment method1.
The split by payment method matters because households on standard credit see a £9 increase in the allowance, while direct debit customers see a £15 reduction and prepayment customers a £3 reduction. Ofgem says it has retained the current differences between direct debit and standard credit customers on debt costs, arguing that making one group bear a disproportionate share of the costs of customers in debt would not protect default tariff customers as a whole1.
The debt allowance of £71 per customer per year is set as a percentage of the cap level, so it will vary over time with overall bill size. Ofgem says it will keep debt costs under close review and consider further changes if costs depart from allowances in a systematic and material way1. For a household, the allowance is one component of a bill that also includes wholesale, network and policy costs, so the effect on energy independence is indirect: it changes the price of staying on a default tariff rather than the underlying cost of supply.
What happens next
The new allowances take effect in the July 2025 cap period, 14b, and remain in place until October 20251. Ofgem has not reported what will replace them after that date. Households with concerns about billing or supplier conduct can use the energy complaints and redress routes overseen by the regulator, whose wider role is set out in the Ofgem guide.