Ofgem’s third working paper considers price cap headroom

Ofgem has released its third working paper surrounding the proposed price cap. It details the regulator’s thoughts on a “headroom allowance”, which it describes as “an amount above the efficient level of costs, which could be used to enable competition to co-exist with the cap.”

The paper is the third to follow the government’s proposed price cap legislation, which was presented to parliament in February. This would see the introduction of a temporary price cap for customers on standard variable tariffs (SVT) and default tariffs, and would create a new statutory role for Ofgem to deliver this measure. It will be Ofgem’s responsibility to design and implement the price cap.

The second paper looked at using a “market basket” to set the initial level of the default tariff cap, which could then be updated over time, while the first addressed what the regulator described as “high level questions surrounding the cap”.

All the working papers are designed to explain Ofgem’s thinking on the design of the default tariff cap, which the regulator said would “evolve” as it “gathers views and evidence over the coming months.”

The proposed cap will be time limited and could be removed from the market in 2020 if a review finds it is no longer required as a precaution against overcharging. If the 2020 review finds the cap is still needed, it could be extended on an annual basis out to 2023.

Ofgem added it would welcome all feedback “and further engagement” on its initial thinking and the analysis it is planning to undertake. It said it was specifically interested in views on:

• alternative sources of evidence or analysis it should consider
• its approach to assessing the impact on consumer bills and on revenues and profitability, and in particular the best way to assess the impact on the smaller suppliers
• additional data that could be useful in looking at the impact of price differentials on switching.

Comments should be submitted to Ofgem by 23 April.