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Ofgem increases price cap by almost £24 as 'Adjustment Allowance' is approved

Image: Getty.

Image: Getty.

Ofgem is to adjust the default tariff price cap by almost £24 in response to growing bad debt as a result of the COVID-19 pandemic.

The regulator reduced the cap – which is designed to protect 11 million households by ensuring they pay a fair price for electricity and gas – by £84 annually from 1 October 2020 in response to changes to the wholesale energy price during the first COVID-19 lockdown.

But ahead of the next price period, Ofgem has decided to raise it again to allow suppliers to recoup some of their costs as part of a so called 'Adjustment Allowance'. This follows a consultation launched in November 2020, in which the regulator considered the allowance to help suppliers deal with the economic fallout of the pandemic.

As such, Ofgem is to adjust the default tariff cap by £23.69 per customer for the price period beginning 1 April 2021, a conservative amount, it stated, based on an initial estimate of the costs - specifically debt-related costs – that is waited in favour of customers.

“We do not believe it is customers’ interest to delay allowing suppliers to start to recover these additional costs. This would mean customers facing a much higher adjustment for the next cap period next winter – the time when energy use and bills are at their highest,” explained Ofgem CEO Jonathan Brearley in the foreword of the decision.

With the impact of the pandemic continuing to evolve, further reviews will be needed of the costs going forwards. Ofgem will launch a review over the first half of 2021 to assess whether a float is required for the following price cap period, which is period seven and is set to launch on 1 October 2021.

The final level of the default price cap - which will include this 'Adjustment Allowance' together with consideration of other factors like wholesale prices - will be published soon. The regulator expects the first “true-up” for a price cap period won’t take effect until 1 April 2022, following collection and consultation of bad debt data and stakeholder engagement. It added that the decision to float for the next cap period does not “prejudge the approach we may take to determining the true-up for any cap period".

Cornwall Insight predicted in January that the default price cap could overall increase by £66 from April 2021 as wholesale power prices increased following the first lockdown in the UK.

While the price cap increase could lead to higher household bills, shopping around can protect customers from this, as competitive tariffs are currently priced around £180 below the period five price cap.

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