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Finance

Ofgem reviews energy price cap operating cost allowances

Ofgem is reviewing the operating cost allowances within the energy price cap.

This includes setting allowances based on up-to-date information, exploring different methods and updating allowances in the future.

The review invites responses from those interested in how these allowances are set, including energy suppliers, industry bodies, consumer groups and charities.

The consultation aims to ensure the energy retail market remains investable and resilient, while continuing to protect energy customers.

Changes based on this review will not take effect until at least April 2025.

The consultation closes at 11:59 pm on 14th June 2024.

Operating costs refer to an energy supplier’s own costs for retailing energy, such as running call centres and IT costs.

These do not include the cost of buying energy, government schemes, or network costs.

Operating costs vary depending on how customers pay for their energy, with Direct Debit, Standard Credit, and prepayment meter customers incurring different costs.

Operating costs account for about 15% to 20% of an energy bill for those paying by Direct Debit, spread across three parts of the price cap.

The operating cost allowances include an allowance for running an energy supplier’s business to serve Direct Debit customers, such as billing and payments; a payment method uplift for extra costs to serve Standard Credit and prepayment meter customers; and the Smart Meter Net Cost Change (SMNCC) allowance for the rollout of smart meters.

Ofgem’s review covers core operating costs, debt-related costs, smart metering costs and pass-through industry charges.

This review responds to significant changes in the energy market since 2019, including the impact of the coronavirus pandemic, the gas crisis, changes in the frequency of energy price cap reviews, and shifts in the number of energy suppliers.

The data on which the current allowances are based dates from 2017 or earlier.

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