Ofgem to limit number of ad-hoc price cap adjustments

Ofgem has said it wants to limit the number of “ad-hoc adjustments” it needs to make to the energy price cap.

The regulator’s review into operating cost allowances within the cap follows significant changes in the market since 2019 as a result of the pandemic and gas crisis.

Additional changes have been made to how often the energy price cap is reviewed, and a number of suppliers have also joined and left the market.

Furthermore, Ofgem explained, the data that the allowances are based on is from 2017 or earlier.

The consultation considers options for updating the operating costs allowance so that Ofgem can consider how best to reflect potential future cost changes and better ensure the allowance remains appropriate over time.

It said: “There are a number of reasons that efficient costs may change over time. For example, inflation, changes in activities, changes in efficiency or regulatory changes.

“We cannot fully control these in the update approach, however we would want to set an approach that limits the number of ad-hoc adjustments we need to make to the cap in future. This is because ad-hoc adjustments can give uncertainty and are resource intensive.”

The regulator is considering three options for the update approach:

  • option 1, indexed by inflation (CPIH)
  • option 2, indexed by inflation (CPIH)-x (where ‘x’ could be positive or negative)
  • option 3, indexed by a different external indicator

Other options being considered by the regulator include debt-related costs, and costs concerning the smart meter rollout.

Any changes that Ofgem does decide to go ahead with will not be made “until at least the April 2025 price cap period”, it said.

The energy regulator is due to announce its latest price cap update towards the end of this month.