Ofgem has announced a review of wholesale energy costs within the framework of the price cap.
The aim of this review is to assess whether the allowances provided to suppliers accurately reflect the actual costs incurred during the period from October 2022 to September 2023.
Dan Norton, Deputy Director of Price Protection for Ofgem, notified energy companies of the review through an open letter.
Allowances are essential components of the price cap, designed to assist suppliers in covering the efficient costs associated with providing energy to consumers, thereby ensuring market stability.
Historically, these allowances have been increased to account for elevated wholesale market prices resulting from exceptional events such as the Covid-19 pandemic and the Russian invasion of Ukraine.
With the stabilisation of conditions in the retail market, Ofgem will now evaluate whether these allowances provided a benefit or caused costs for suppliers as prices decreased in 2023.
If necessary, adjustments will be made to the January 2024 price cap to ensure that any previous gains are recouped and passed back to customers during the upcoming winter season.
Additionally, Ofgem’s review will scrutinise the recovery period for backwardation costs.
Backwardation costs arise from discrepancies between the wholesale energy purchasing costs for the forthcoming quarterly cap period and the annual period during which the cap is set.
Currently, Ofgem allows a six-month recovery period for these costs in the cap.
However, the regulator will now explore whether alternative measures, such as an extended recovery period, could be more favourable for consumers by promoting bill stability.
Director of Price Protection for Ofgem said: “As set out in our Chief Executive Officer’s letter of 4th July, we are keeping the price cap formula under review to ensure that customers continue to pay a fair price that reflects the underlying efficient cost to supply the energy and it does not over-reward suppliers where a fall in prices may lead to benefits.”
