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Ofgem consults on COVID-19 cost adjustments for next price cap period

Image: Getty.

Image: Getty.

With debt related costs back to pre-pandemic levels, Ofgem is considering not adding an additional float to price cap period seven.

This follows the regulator including an additional allowance in the sixth cap period (April-September 2021) after finding that the pandemic had resulted in additional costs for suppliers, with these specifically being debt-related costs for credit meter default tariff customers.

This additional allowance was set up as an estimate - known as a float - which Ofgem would later “true-up” using final costs. It saw the default tariff cap adjusted by £23.69 to allow suppliers to recoup some of their costs.

However, the regulator said it has found no evidence that a second float is necessary. It reviewed suppliers’ forecasts for debt-related costs and the forecast of key economic metrics, concluding that suppliers’ forecasts of debt-related costs for both credit and prepayment meter customers are not materially greater than their pre-COVID-19 levels.

Current evidence also shows a positive economic outlook for cap period seven, stretching for six months from 1 October. The economy is forecast to grow at a faster rate in the period, Ofgem said, and unemployment is expected to remain broadly stable.

However, the regulator is proposing to amend its methodology for the COVID-19 adjustment in its February decision, suggesting it includes additional filters on suppliers’ forecast costs before including them in its sample.

It is also proposing to introduce a sharing factor of 50:50 before calculating the amount to recover from customers if a float for cap period seven is necessary, ensuring that its float estimate is conservative and that it errs on the side of customers.

The consultation - which can be found here - is open until 15 June 2021, with a final decision set to be published in early August before the next price cap update takes effect from 1 October 2021.

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