U.K. regulator Ofgem has released a price cap proposal which will apply to retail electric and gas suppliers' "default tariffs"
On 19 July 2018, the Domestic Gas and Electricity (Tariff Cap) Act came into force. This legislation requires Ofgem to design and implement a temporary cap on standard variable tariffs and fixed term default tariffs
Ofgem proposes to set the caps by estimating efficient costs at typical consumption using a “bottom-up” cost assessment. Under this approach, Ofgem estimates efficient allowances for different categories of costs. Ofgem then adds these together to derive an estimate of the total costs for a given customer type. Ofgem set the overall level of the cap with reference to this estimated benchmark. Costs include wholesale costs, Policy costs, Network costs, Operating costs, Payment method adjustment, EBIT, and headroom.
Ofgem proposes to apply a 1.9% EBIT margin, as at typical consumption. Ofgem proposes to apply the same headroom adjustment percentage as at typical consumption.
Ofgem will update the level of the cap in April and October every year to reflect the latest estimated costs of supplying electricity and gas.
Caps will differ by customer and payment type/credit.
Ofgem said that when the price cap is introduced suppliers will have to cut their prices to the level of or below the cap, proposed to be £1136 per year for a typical dual fuel customer paying by direct debit, forcing them to scrap excess charges for people on poor value default deals.
Ofgem in 2017 96% of Standard Variable Tariff (SVT) customers would have paid less under the proposed cap, and that, in total, SVT customers would have paid £1.3 billion less than they were charged in that year
Ofgem said that the price cap is designed to be a temporary measure, in place until 2023 at the latest. This will allow Ofgem to put in place further reforms to make the energy market more competitive and work better for all consumers, including making switching energy supplier easier, quicker and more reliable.