Ofgem to extend bad debt support provision in price cap

Ofgem is proposing to extend an allowance in the price cap which enables suppliers to recover bad debt costs in relation to additional support credit (ASC).

ASC is provided by retailers to prepayment meter (PPM) customers who are in danger of self-disconnecting after previously using up other options such as emergency or friendly hours credit. Funds which are not repaid are ultimately written off as bad debt.

Ofgem initially introduced a temporary allowance worth £8.77 per typical PPM customer last year in response to concerns over increasing ASC bad debt costs.

An open letter by the regulator’s deputy director of retail, Chris McDermott, has since revealed that Ofgem is proposing to extend the allowance at its current level beyond September 2024, when it is currently due to come to an end, until the outcome of its operating costs review is implemented, or until it decides to carry out a review of the ASC allowance.

“The latest ASC data we have gathered continues to show an increasing year on year trend of ASC being issued. We estimate that the ASC level increased by 162% between 2022/23 and 2023/24, with a broadly commensurate increase in suppliers’ provisions for ASC bad debt of 133% between the same periods,” the regulator explained.

It further added: “Since we began recording ASC data, on average the value of ASC issued has increased by 102% from the winter 2021/22 to the winter 2023/24, and the value of ASC bad debt has increased on average by 92% between the same periods.”

In making its decision, the energy regulator considered three options:

• Do nothing – let ASC allowance in the cap end in September 2024
• Extend – Extend the current ASC allowance
• Review – Extend and refine the size of the ASC allowance using latest data

To do nothing, Ofgem warned, means the price cap may not reflect efficiently incurred costs, at least until the operating costs review is implemented.

“We consider that if the cap level does not reflect efficient costs, it is reasonable to consider that consistent application of the best practice in relation to ASC may be adversely affected, the impact of which would be to affect PPM customers who need ASC, including those in vulnerable circumstances. However, we are clear that suppliers are, regardless of the cap level, obliged to provide ASC in line with the relevant SLCs,” it said.

Meanwhile commenting on the third option, to extend and refine the size of the ASC allowance, Ofgem said this could potentially provide a benefit in terms of accuracy of the allowance.

However, it added, Ofgem considers that the current allowance has been appropriate.

It further added: “By carrying out an additional review of the allowance methodology, there is a risk of delay in implementation for October 2024, due to timings around availability of newer data and undertaking an appropriate consultation process.”

Industry stakeholders are asked to respond by 12 July, with a final decision due by the end of August.