Overview of 4 February 2022 Price Cap decisions
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Today Ofgem has published a range of decision documents relating to the default tariff cap (the ‘cap’) methodology. Following consultations with industry stakeholders, we have made routine methodology decisions to ensure that the cap better reflects the costs of supplying energy, as well as decisions in response to the recent wholesale market volatility and to allow the cap to respond flexibly to exceptional or unprecedented market changes in the future.
This page summarises the package of decisions we have made, in addition to guidance for suppliers on treatment of reasonable risk management practices in future default tariff cap proposals.
Included in this bundle of documents related to the cap is:
This document sets out our decision to adjust the cap in cap periods eight (April - September 2022) and nine (October 2022 – March 2023) to account for the additional costs incurred by suppliers as a result of rising wholesale market prices and volatility in cap period seven (October 2021 – March 2022). We have decided to make the adjustment by amending the percentage (%) value of the wholesale additional risk allowance, for gas and electricity, to a level that reflects the efficient and material costs incurred by suppliers during price cap period seven that specifically relate to wholesale market volatility.
View decision on the potential impact of increased wholesale volatility on the default tariff cap
In November 2021, we consulted on proposals to modify the licence to allow us to make an in-period adjustment to the cap level in exceptional circumstances. Having reviewed stakeholder responses to this consultation, we have decided to proceed with the modification. We have decided to implement a test framework that consists of a set of qualitative criteria which will be guided by quantitative data. The framework consists of five criteria that a situation must meet for an exceptional circumstance to trigger an in-period adjustment.
This document sets out our decision to amend the default tariff cap for gas customers to provide an additional allowance for the Green Gas Levy, which will fund the Green Gas Support Scheme. We have decided to amend the cap methodology to introduce the Green Gas Levy allowance, for both credit and prepayment gas customers. We have also outlined how we have amended the methodology in ‘Annex 4 - Policy cost allowance methodology’ of standard licence condition (SLC) 28AD to include the allowance in the default tariff cap.
This is the final decision on the 2021 annual review of the credit and PPM Smart Metering Net Cost Change (SMNCC) allowances. The SMNCC accounts for the net impact of the smart meter rollout on suppliers’ efficient operating costs. We have set out how we will update the non-pass-through SMNCC in the default tariff cap for cap period eight and beyond. The SMNCC allowances for cap periods beyond cap period eight are subject to revision through subsequent annual reviews.
View decision on credit and PPM SMNCC allowances
This sets out our decision to amend the licence conditions and our methodology to introduce the use of End User Categories (EUCs) specific to prepayment meter customers. EUCs determine the demand attributed to customers paying by a certain payment method and allow for a more granular view of the costs associated with PPM customers. This change will allow for a more appropriate reflection of efficient costs associated with PPM customers from cap period eight onwards.
View decision on reflecting prepayment End User Categories in the default tariff cap
This outlines the final decision on determining the ECO scheme and WHD scheme allowances from cap period eight onwards. BEIS is currently consulting on to extend ECO with the next phase of the scheme, ECO4, covering the period from Aprils 2022 to March 2026. BEIS is also consulting on extending the WHD through to Scheme Year 15 ending in 2026. We have set out how we will use the latest available information of scheme costs published by BEIS to calculate the ECO4 and WHD allowances in our existing cap methodology. It also includes a contingency (an allowance correction mechanism) given that the schemes are yet to be approved by Parliament.
This outlines our decision to amend how gas Supplier of Last Resort (SoLR) levy costs are included in the default tariff price cap by introducing a new SoLR customer levy input. The changes we are making reflect a separate decision to approve ‘UNC797 - Last Resort Supply Payments Volumetric Charges’; this modification changed how SoLR levy costs are recovered from suppliers. The changes set out in our decision will make sure the default tariff price cap is aligned with this decision.
View decision on reflecting change to gas SoLR levy costs in the default tariff cap
This letter sets out a summary of announcements being implemented for cap period eight (April – September 2022), the changes we are consulting on for implementation in cap period nine (October 2022 – March 2023) and guidance for suppliers to support them in making prudent risk management decisions during the consultation.
Going forward
The above decisions will come into effect from cap period eight, starting 1 April 2022.
In addition to these, we have also announced today:
A policy consultation on potential changes to be implemented by October 2022, including:
- reducing the advance notice Ofgem gives to suppliers of the updated price cap level before it comes into effect from two months to one month
- a new mechanism to address backwardation costs in excess of the normal seasonal basis risk and
- moving to quarterly price cap updates (our preferred option), price cap contracts, or a strengthened status quo.
View consultation on Medium-Term Changes to the Price Cap Methodology
Ofgem is continuing to consider other short-term interventions that can be put in place to further stabilise the retail market and protect consumers. This follows our consultation that closed on 17 January 2022. We intend to publish our decision on these matters shortly.
- View decision on Strengthening Milestone Assessments and Additional Reporting Requirements
- View consultation on changes to Ofgem's guidance on applying for a gas or electricity licence.