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Ofgem consults on recalculating the energy price cap

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Written by: Emma Lunn
19/11/2021
The energy regulator has launched five consultations on proposals to change the way it calculates the energy price cap.

Ofgem says it wants to ensure that the price cap reflects the costs, risks and uncertainties facing energy suppliers. Surging wholesale gas prices mean 22 energy suppliers have gone bust since August, including Neon Reef and Social Energy Supply which both ceased trading this week.

The energy price cap means energy firms are unable to pass soaring wholesale energy costs onto customers.

Ofgem has put forward five proposals and is inviting stakeholder views on them by 17 December 2021. It plans to make a decision by the beginning of February 2022, after taking stakeholders’ views into account.

Ofgem’s first consultation will look at the potential impact of increased wholesale volatility on the default tariff cap. This consultation considers whether the recent market volatility has caused the level of the price cap to materially depart from the efficient cost level allowed for in the price cap.

The second consultation looks at the process for updating the default tariff cap methodology and setting maximum charges. This consultation sets out proposals to modify the licence to introduce an ability for Ofgem to amend the cap outside of its routine six-month cycle, where exceptional circumstances occur.

The next consultation looks at the ‘true-up process’ for Covid-19 costs. The regulator previously concluded that the Covid-19 pandemic had resulted in additional material costs, specifically debt-related costs for credit meter default tariff customers.

Another consultation will look at reflecting ‘end user categories’ in the default tariff cap. The proposed change will allow for a more appropriate reflection of efficient costs associated with prepayment meter customers from cap period eight onward.

The final consultation is on the ‘Energy Company Obligation’ scheme allowance methodology in the default tariff cap. This consultation proposes a new input that will enable Ofgem to allow for the costs of the ECO4 scheme. It also includes a contingency given that the scheme is yet to be approved by Parliament.

Ofgem said in a letter to suppliers last month that it would be looking at changing the methodology it uses to calculate the energy price cap to help energy suppliers cover their costs.

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