Ofgem is consulting on amending the default tariff price cap, in a move that would increase household energy bills by £21 per household.
When the COVID-19 lockdown was brought in the UK and the wholesale energy price plummeted, the regulator reduced the level of the default tariff price cap – which is designed to protect 11 million households by ensuring they pay a fair price for electricity and gas – was lowered by £84 annually from 1 October.
But as the impact of the pandemic continues to be keenly felt – in particular with increased unemployment and many households struggling to pay their energy bills - this is having a knock on effect on suppliers, who are expecting the number of unpaid bills to rise this winter.
“The existing price cap methodology includes an allowance for suppliers to recover the cost of bad debt expected in normal economic times. But the pandemic has resulted in anticipated bad debts rising to levels that aren’t covered by the cap,” explained Anna Rossington, deputy director of Future Consumers & Retail Price Protection at Ofgem.
“This is why we are now considering whether these higher “bad debt” costs for suppliers should be factored into the default tariff price cap when we next update it from 1 April 2021.”
The ‘Adjustment Allowance’, could be brought in from next April and run over the summer to help suppliers deal with the economic fallout. It would see households energy bills rise to compensate for the number of unpaid bills.
It could be partially offset by the end of the temporary £15 increase, currently in place as a result of a judicial review into how Ofgem calculated suppliers’ wholesale energy costs in the first cap period. As such the net impact could be closer to a £6 increase according to Ofgem.
The regulator stated that its priority has been protect customers, especially those in vulnerable circumstances. It has strengthened protections for customers over the winter months, with new license conditions requiring suppliers to offer emergency credit to customers from 15 December for example.
Ofgem’s consultation on the default tariff price cap is now open, and will be until 21 December 2020, with Ofgem set to publish a final decision in early February 2021. Following this, the next price cap update will take effect from 1 April 2021.