Next step taken to permanently end prepayment premium

Ofgem has appointed the Retail Energy Code Company to develop processes and systems to levelise energy bills between prepayment meter and direct debit customers.

The selection has been made despite the fact the regulator has not yet made a decision on exactly how this should be done.

Energy customers paying by different means have for a long time paid different prices for the same tariffs. Prepayment meter (PPM) customers in particular have previously been charged a premium over direct debit customers due to their higher administrative costs to suppliers and greater propensity to incur debts they cannot pay off.

These cost differences are also reflected in Ofgem’s price cap on standard variable tariffs, which sets different rates for these groups.

The Energy Price Guarantee (EPG) was introduced by the government in October 2022 to limit the annual energy bill for a typical household to £2,500. To do so, the scheme provided subsidies to suppliers to make up the difference between the price cap and the EPG, including additional subsidies to cover the PPM premium.

Most households stopped benefitting from the subsidies in July when the Energy Price Guarantee was raised to £3,000 at the same time as the price cap was cut, leaving the latter significantly lower than the former. However, the additional subsidies for PPM customers remained in place and will continue to do so until the EPG comes to an end in March 2024.

In March of this year, the government tasked Ofgem with developing proposals for permanently ending the PPM premium on standing charges once the EPG is withdrawn, and in August, the regulator launched a consultation on possible options.

Levelising prices between PPM and direct debit customers will require money to be redistributed from suppliers with proportionally fewer PPM customers to those with more.

Ofgem proposed several options for doing this, including a fixed daily charge on suppliers, volumetric charges based on estimated or actual consumption, or some combination of both. The regulator said it was also considering similar arrangements to levelise prices between standard and direct debit customers.

It has now appointed the Retail Energy Code Company act as a “non-volumetric reconciliation operator” meaning the company will be required to “develop industry processes, as well as design, build, test, and deliver a functional system that will enable the facilitation of payments between suppliers to allow for non-volumetric levelisation.”

This is despite the fact that “no final decision” has been on how to implement levelisation.

“If industry is to deliver an effective scheme by 1 April 2024, then it is accepted that work needs to commence on this imminently, to allow for the solution to be built and tested, as well as co-designed with industry to fulfil levelisation requirements in time,” the regulator explained in an open letter to the company.

“It is important for PPM consumers that there is no gap in the levelisation of PPM tariffs against direct debit tariffs as currently implemented through the EPG. If a solution is not in place from 1 April 2024, then PPM consumers would incur higher charges.”

Ofgem said it is “still considering to what extent levelisation should include volumetric levelisation,” but added: “We are mindful that, if implemented, a volumetric approach would be much more complex, require wider industry data and engagement and could not be delivered by 1 April 2024.

“As a result, we consider it prudent at this time to limit the scope of work for the reconciliation operator to the development of a non-volumetric solution pending the outcome of policy decisions.”

Ofgem said it expects to make a decision in early 2024 following a statutory consultation that should begin later this month.

The regulator said if it decides to also implement volumetric levelisation, it will “work with industry to determine which body or bodies could operate as volumetric reconciliation operator alongside the non-volumetric system.”