Ofgem has updated on when it expects to implement the “true-up” to reflect the final costs of Covid-related bad debt in the default tariff cap.
The energy regulator introduced an adjustment to the cap earlier this year to account for an initial estimate of additional bad debt as a result of the pandemic.
This decision related to the additional costs incurred in cap periods four to six (April 2020 to September 2021).
Ofgem will adjust the initial estimate, known as a float, to reflect the final costs once they are fully known (the true-up).
A working paper published by the regulator this week reveals its aim of implementing the first true-up in cap period nine (October 2022 to March 2023).
Ofgem said a true-up in this cap period provides it with a more resilient plan and allows it to investigate data source options further which will improve the accuracy of the true-up.
Meanwhile the regulator is consulting on three options for sourcing supplier data on Covid-related bad debt that it could use to calculate the true-up:
- Option A: Top-down, this approach would look back and focus on a particular period of billed consumption, and look at the combination of provisions for doubtful debts and write-offs that suppliers have made in relation to that cap period of billed consumption up to the point it gathers data.
- Option B: Iterative bad debt charge, Ofgem asks suppliers to provide their bad debt charge for a number of accounting periods. The charge incorporates new provisions, provision movements and write-offs. This option therefore assumes that the total impact of bad debt in relation to a particular cap period of billed consumption will eventually be reflected in suppliers’ accounts.
- Option C: Bottom-up, Ofgem asks each supplier for their level of outstanding debt from a particular period of billed consumption in the past. Ofgem then needs to make an assessment of the recoverability of the outstanding debt.
Ofgem intends to issue a policy consultation in early Autumn 2021 and a final consultation in the Spring.
This would be followed by a decision in the Summer of 2022, applying the first true-up from 1 October 2022.