Ofgem is considering adjusting the price cap on default tariffs to loosen the reins on suppliers whose customers are unable to pay their bills as a result of the coronavirus pandemic.
In a consultation issued today (14 September), the regulator said its initial view is that there has been a “material change” in the rate of non-payment and that an increase in the price cap may be required to account for a subsequent rise in the amount of bad debt.
“The coronavirus pandemic, and the measures put in place to limit its impact, have significantly affected the energy industry,” Ofgem explained.
“Non-domestic demand has reduced as a result of businesses closing, which has contributed to a fall in wholesale prices. Workers have been laid off, furloughed, or are working from home, increasing domestic energy use. Some customers are struggling to pay their bills. These impacts could increase over winter, as furlough ends, and consumers use more energy.
“The cap already allows for a degree of uncertainty and accommodates certain types of cost change. However, Covid-19 is an unforeseen and unprecedented event.”
Ofgem proposed to apply any adjustment “on top” of the existing price cap “rather than amending individual cap allowance methodologies”.
It made clear that tweaks will only be made if there are “clear and material systematic impacts” that are not accounted for by the existing methodology: “The question is not whether Covid-19 has changed any costs; it likely has. Some costs have increased, whilst others have decreased. The question is whether the existing cap methodology sufficiently accounts for these changes.”
The regulator said it believes “the only material costs we might need to adjust for are additional debt related costs”. It added: “While we have identified other potential impacts, our initial view is that they are either allowed for through the existing methodology or are not material enough to require adjustment.”
It said an initial adjustment would cover the sixth price cap period running between April and September of 2021 and confirmed that a decision on the level of the price cap will be announced in February.
Ofgem additionally recognised that the impact of the pandemic will be prolonged and “may be greater over winter”. It therefore proposed to carry out at least one more review to assess further changes in costs.
It said it is still unsure how often these reviews should take place: “Increased frequency of reviews may improve the timing alignment between costs incurred and the cap level. However, more frequent reviews incur additional administrative burden on stakeholders and ourselves.
“This can lead to additional complexity, with costs incurred in a single period reviewed and amended multiple times as more information becomes available. This is particularly relevant for debt-related costs, where some costs can take over a year to fully crystallise.”
The regulator said it would ideally adopt a “mechanical adjustment process” that would take place every six months and align with the rest of the price cap mechanism: “However, at this stage we do not consider it feasible to develop a sufficiently robust calculation approach that could be applied in this mechanistic way, given the highly uncertain nature of Covid-19 and the lag times for available data.”
It instead suggested holding a second review within the next 12 months and then one more a year later.
At the end of this year, the price cap for prepayment meter customers will expire and they will instead be covered by the default tariff mechanism but at a different level. Ofgem said the potential cost changes due to the pandemic will different for prepayment customers and so any adjustment to the level of their price cap will be considered separately: “Our initial view is that there are no material impacts that would warrant an adjustment to the cap.”
The deadline for responses to the consultation is 12 October.