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Ofgem is again considering whether to adjust the default tariff cap to allow suppliers to recover costs due to the impact of Covid-19.
Last month the energy regulator revealed the latest default tariff cap, which will come into effect on 1 April, will allow suppliers to claim £23 to cover higher levels of bad debt from more customers being unable to pay their energy bills due to the impact of Covid.
The adjustment was set using an initial estimate of the costs (a float) which Ofgem said was “deliberately conservative” in favour of customers for cap periods four to six. This will subsequently be adjusted to reflect efficient final costs once they are fully known (the true-up).
In a new working paper Ofgem says it is consulting on whether a float is necessary for price cap period seven which is between October 2021 and March 2022.
The regulator added there was “significant uncertainty” whether an adjustment for debt-related pandemic costs for the next cap period is needed.
It recognises on the one hand that the economy is likely to be growing during that period, while unemployment would be on a downward trajectory. However, Covid is likely to have reduced customers’ financial resilience and unemployment is predicted to be higher than in 2020, in particular as the government furlough scheme will close at the end of September, which could increase the likelihood of some customers being unable to pay their bills.
“We will only set a float if we have significant and clear evidence that shows suppliers are likely to incur material additional costs due to Covid-19,” the regulator said.
Ofgem is also considering whether to retain its methodology for calculating the float or to include additional filters before including suppliers’ forecast costs into its sample. Additionally, it is seeking views on whether to include a ‘sharing factor’, where suppliers would bear some of the additional Covid-related costs.
In February Ofgem said it did not have adequate evidence of material increases in pre-payment meter (PPM) costs as a result of the pandemic that would warrant an adjustment to the PPM cap level. However, it will consider whether one is necessary going forward.
The regulator said it intends to publish an additional consultation in May, expected to last four weeks, before publishing a decision at the beginning of August.
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