Ofgem has delayed its planned consultation on introducing an allowance in the price cap to recover bad debt to allow it more time to consider the impact of the government’s energy bills support package.
The regulator wrote to suppliers in April indicating its intent to consult on the impact of the sharp increase in wholesale gas prices on bad debt later this year.
Ofgem is considering the “float and true-up approach” already being used for bad debt costs related to the coronavirus pandemic.
However, following the government’s announced of a strengthened support package in May, the energy regulator has said it is prudent to delay the consultation to give it more time to understand the impact of the scheme and high gas prices on supplier bad debt costs.
In a letter to retailers, Adrian Leaker, Ofgem’s head of price cap policy for retail, said the government’s support measures are likely to “materially reduce and defer bad debt incurred” following April’s price cap rise and the subsequent rises forecast for October and January.
Leaker further explained how the regulator had analysed suppliers’ forecasts for the current cap period, as well as for the periods beginning in October and January, and concluded it is likely the existing allowance in the price cap methodology will adequately cover suppliers’ bad debt once the government support package is accounted for.
He said: “There remains significant uncertainty regarding the scale of the impact of high bills on bad debt, as well as the impact of the government support package.
“Starting the consultation too early risks an under or over-estimation of the impact. We will continue monitoring suppliers’ bad debt through our stress tests and supplier monitoring RFIs.”
Ofgem will initiate a policy consultation, Leaker said, but only if its supplier monitoring indicates bad debt levels have risen above the price cap allowance in a “material and systematic way”.
“We recognise this analysis is based on April 2022 supplier forecasts, and subsequent events may have changed this position,” he added.
Covid-19 true-up delay
The letter also stated that Ofgem is delaying its decision on the true-up process for Covid-19 until February next year after several suppliers raised concerns about the methodology.
Last year, Ofgem introduced an additional allowance in the price cap for periods six and seven (April 2021 to March 2022) to take into account additional bad debt costs incurred as a result of the pandemic.
This was set as a “float” based on initial estimates, which would be “trued-up” later using final cost data. Ofgem consulted with retailers to help inform the proposals for the true-up.
However, the regulator was unable to gather data broken down by tariff type such as fixed or default in a “proportionate and consistent basis” meaning it calculated the bad debt charge across all domestic credit customers.
Using this method, the additional bad debt costs for cap periods four to six was calculated at £0.71 per typical dual fuel credit customer (net of the float) and in a consultation published in May Ofgem proposed to make no further adjustments to the cap to “true-up” its initial estimate of bad debt costs.
Leaker explained that four respondents raised concerns about the proposed methodology and that they believed the approach did not account for the higher number of default tariff customers paying by standard credit.
He added: “These stakeholders said that the consultation method significantly under-estimated costs as they consider that there is a higher probability of standard credit customers incurring debt.
“Three stakeholders said that it would be more accurate to calculate the cost for standard credit and direct debit customers separately, before calculating a weighted average for default tariff customers based on the proportions of standard credit and direct debit customers on default tariffs.”
Given the concerns raised, Ofgem has decided to consult on the alternative methodology proposed and said by doing so this it will also reduce the risk of providing suppliers with an under or over-allowance.
The consultation, which will cover Covid-19 costs from cap periods four to seven, will take place this autumn before the regulator makes its decision on the true-up next February.
This topic will be discussed in more detail at Utility Week Forum this November. For more information and to book your place, see our website.