Energy price cap additional wholesale costs decision

What changed

Ofgem decided not to adjust the energy price cap to compensate suppliers for differences between actual wholesale costs and the cap's wholesale allowances between October 2022 and September 2023. This is significant because the period in question covers the tail end of the energy crisis, when wholesale market volatility was extreme and suppliers argued that the cap's standard methodology underestimated their true procurement costs. Ofgem reviewed the evidence and concluded that no retrospective adjustment was warranted.

Alongside this, Ofgem made two small changes to the Annex 2 wholesale allowance methodology model — the formula that calculates how much headroom suppliers get for wholesale procurement within each cap period. The decision followed a formal consultation (the Energy price cap wholesale costs review) and reflects stakeholder feedback.

What this means in practice

For consumers: The cap stays where it is. An upward adjustment would have increased the price cap level directly, since wholesale costs are the single largest component — typically 40-50% of the total cap. By rejecting the adjustment, Ofgem avoided passing additional costs through to all 29 million domestic customers on default tariffs.

For suppliers: The message is clear: the cap methodology is not a guaranteed cost pass-through. Suppliers who over-hedged, mis-timed their procurement, or faced basis risk during the crisis period will not be made whole retrospectively. The wholesale allowance is designed to reflect efficient procurement costs, not actual costs incurred by individual suppliers. Suppliers who managed their hedging books well during 2022-23 will have outperformed the allowance; those who didn't will have absorbed the loss.

The two methodology changes to Annex 2 are described as "small" by Ofgem. Without the full PDF, the precise mechanics are unclear, but methodology tweaks to the wholesale model typically involve adjustments to the observation windows for forward prices, shaping and imbalance allowances, or the backwardation/contango assumptions embedded in the hedging strategy the cap assumes. Even minor changes compound across millions of accounts and multiple cap periods.

The structural point: This decision reinforces Ofgem's position that the cap methodology should reflect what an efficient supplier *would* pay, not what suppliers *did* pay. That is a defensible principle in normal markets. During the 2022-23 crisis, when forward curves moved by multiples within single trading days and liquidity in some products evaporated, the gap between "efficient theoretical procurement" and "what was actually available in the market" was arguably wider than at any point since the cap's introduction in 2019. Ofgem's refusal to bridge that gap tells suppliers that crisis-period procurement risk sits with them, not consumers.

Who benefits from this decision: Consumers, straightforwardly — they avoid a retrospective cap increase. But also suppliers with disciplined hedging operations, since the decision validates the principle that the allowance rewards efficiency rather than compensating for cost overruns.

Who loses: Suppliers who genuinely faced higher-than-modelled procurement costs during the crisis and were hoping for ex-post relief. Some of these costs may have been unavoidable given market conditions, but Ofgem has drawn the line: the methodology is forward-looking and cannot be retrospectively recalibrated each time actuals diverge from assumptions.

What happens next

The decision document includes a summary of stakeholder feedback on priorities for future wholesale methodology reviews. This signals that Ofgem is open to forward-looking changes to how wholesale allowances are calculated, even as it refuses backward-looking adjustments. The areas likely under consideration include:

- Hedging strategy assumptions. The cap assumes a specific procurement pattern (buying forward in roughly equal tranches over a defined window). If market structure has changed — less liquidity in seasonal products, more reliance on shorter-dated hedges — the assumed strategy may need updating. - Shaping and imbalance costs. The allowance for converting baseload forward purchases into the half-hourly demand profile suppliers actually serve. These costs spiked during the crisis and may have permanently shifted. - Backwardation allowance. The cost of rolling forward positions as contracts approach delivery. This is mechanically sensitive to the shape of the forward curve.

Any future methodology changes will go through a separate consultation. The two small Annex 2 changes decided here take effect within the existing cap framework — likely applying from the next cap period calculation onwards.

The broader context is Ofgem's ongoing review of whether the cap methodology remains fit for purpose after the crisis. The wholesale component is the largest and most volatile element, and the question of how much procurement risk consumers should bear (via the allowance) versus suppliers (via their margin) is not settled. This decision answers the backward-looking question — no adjustment — but the forward-looking question remains open.