Utility Week

12 | MARCH 2022 | UTILITY WEEK Energy retail Analysis Is £9.1bn enough to tackle energy crisis? Customers hit by a 54% rise in the price cap in April will be cushioned by a series of measures outlined by the Treasury (see Review). As part of our Energy Reset campaign, Utility Week digs into the details of Ofgem's approach to the cap and the government support measures, and asks what this means for long-term reform of the retail market and protection for consumers. The reasoning behind the price cap rise Tom Grimwood and Adam John As well as announcing the final figure for April's rise in the price cap, Ofgem also pro- posed introducing a quarterly cap period. The regulator identified this as its prefer- ence out of three potential options to make the cap more resilient to extreme price vola- tility, which were first outlined in a call for input in December and are now subject to a formal consultation. One of the other options under con- sideration is a "strengthened status quo" consisting of a six-month cap but with the possibility of earlier reviews in exceptional circumstances. Ofgem's third solution is a "price cap contract" – six or twelve-month contracts – without exit fees. In documents released alongside the cap rise, Ofgem revealed that it includes a £61 upli„ for wholesale costs incurred during the current six-month period. It said the corrective measure, which also applies for the next cap period, is intended to reflect exceptionally high wholesale costs and market volatility that were "beyond what was accounted for" in the seventh price cap period from October 2021 to March 2022. It said the adjustment would be applied as upli„ to the existing wholesale addi- tional risk allowance, which is normally set at 1% of direct fuel costs but will be raised to 8.7% for electricity and 6.1% for gas for the eighth price cap period covering April to September 2022. The allowance will equate to £71 for a dual fuel customer, comprising £10 for the original value of 1% of direct fuel costs plus adjustments of £34 and £27 for electricity and gas respectively. The regulator also amended the cap methodology to reflect the introduction of a new charge on gas distribution customers to recover the costs of Last Resort Supply Payments. Last Resort Supply Payments allow retail- ers to claim back otherwise unrecoverable costs incurred by becoming a Supplier of Last Resort (SoLR). The payments are made by distribution networks, with the costs recouped through their charges. The modification to the Uniform Network Code (UNC) will introduce a new volumetric charge on gas usage, while also ensuring costs originating from domestic and non- domestic gas supply are charged to the cor- responding market segment. Ofgem rejected an alternative modifica- tion that would instead of introduced a flat standing charge on gas meters. For customers with a typical consump- tion profile, the regulator estimated the cost of the levy at £33 over the next price cap period or £30 for prepayment meter customers.

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