Energy price cap methodology: contracts for difference review

What this is about

Ofgem is testing whether the contracts for difference allowance in the default tariff cap is set correctly. This is a call for input, not yet a full consultation: Ofgem has gathered points from suppliers and other organisations through recent engagement, and is now asking for evidence on whether the CfD methodology needs to change. It opened on 27 August 2025 and closed on 11 October 2025.

The CfD allowance is the part of the cap that covers what suppliers pay into the CfD scheme. Suppliers do not buy CfD-backed power directly; they pay the Low Carbon Contracts Company through the Supplier Obligation, an interim levy reconciled quarterly against actual scheme costs. When wholesale prices sit below the fleet of strike prices, generators are topped up and the levy rises; when wholesale prices run above strike prices, generators pay back and the levy can turn negative. The cap has to forecast this in advance, over a price-cap period, using a methodology that converts an inherently volatile, backward-reconciled levy into a fixed per-customer allowance set months ahead. The structural problem is timing: the cap is set on a forecast, the levy is settled on outturn, and the gap between the two is a forecasting risk that someone bears.

The trigger is Ofgem's wider review of the wholesale cost allowance, set out in its 2025 and 2026 programme of work. The CfD allowance is one strand of that review, alongside the broader question of how additional wholesale allowances are constructed. Suppliers have raised the methodology in engagement, which is what prompted Ofgem to formalise the question. The economic stakes are not trivial: CfD payments are a material line on the bill, and the methodology determines not the total cost (that is fixed by the strike prices already contracted) but the timing and the allocation of forecast error between suppliers and consumers. This sits alongside two parallel cap-methodology workstreams running in the same period, the Nuclear RAB allowance update and the Warm Home Discount updates, all of which share one feature: they are mechanisms for passing administratively determined, redistributive costs to consumers through the cap, and each is being re-examined for whether the pass-through is accurate through time.

Options on the table

Ofgem has not published discrete numbered options in this call for input. It sets out its current views on points raised in engagement and asks for evidence rather than proposing a menu of alternatives. The detail that would define specific options sits in the call for input document itself ("Contracts for difference allowance in the default tariff cap: call for input", PDF), which is not reproduced in the source text provided. What can be stated from the published material is the shape of the decision rather than its branches: Ofgem is deciding whether to retain the existing CfD allowance methodology or amend it, and the substance of any amendment turns on how the forecast levy rate is estimated and how the lag between forecast and outturn is handled.

The structural choice underneath any option is who carries the forecasting risk. If the allowance is set on a forecast that proves too low, suppliers are under-recovered for the period and must wait for a later true-up; if it is set too high, consumers overpay in-period and are corrected later. A methodology that tracks the levy more closely in time reduces the size of these swings but increases the frequency of adjustment. A methodology that smooths over a longer window is more stable per period but accumulates larger reconciliation balances. There is no option here that removes the cost; the strike prices are already contracted and the total flows through regardless. The only thing the methodology can change is the timing of recovery and which party is exposed to the error in between. That is the real subject of the review, even though the call for input does not frame it as a formal set of options.

Questions being asked

Ofgem states it has set out specific questions in the call for input document and welcomes wider views, but the questions themselves are in the PDF rather than the page text provided, so they cannot be reproduced verbatim or grouped by theme here. From the framing on the page, the questions fall into one identifiable area:

Whether the methodology should change

The central question is evidential rather than design-led: Ofgem is asking respondents to provide clear evidence on whether the CfD allowance methodology in the default tariff cap should be changed at all. This is the gating question. It is not asking how to redesign the allowance but whether the case for redesign has been made. That framing matters: the burden is on respondents to demonstrate a problem with the current approach, not on Ofgem to defend it. Anyone arguing for change needs to bring quantified evidence of mis-recovery, timing mismatch, or volatility under the existing method.

To see the full set of specific questions, the call for input document ("Contracts for difference allowance in the default tariff cap: call for input" [PDF, 201.94KB]) must be consulted directly. The page confirms only that questions exist and that wider views beyond them are welcome.

How to respond

The call for input closed on 11 October 2025 (the page also references a submission date of 10 October 2025; respondents should treat the earlier date as the operative deadline). This is now closed and no longer open for response.

Responses were submitted by email to priceprotectionpolicy@ofgem.gov.uk.

Supporting document: "Contracts for difference allowance in the default tariff cap: call for input" [PDF, 201.94KB], available from the Ofgem publication page. Related Ofgem material: the Energy price cap pages and the Energy price cap programme of work for 2025 and 2026, which set out where this strand sits in the wider wholesale cost allowance review.

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A note on what is missing here: the substantive detail of this call for input, the specific methodology Ofgem currently uses, the points suppliers raised in engagement, the questions asked, and any indicative options, all sit in the 202KB PDF rather than the web page that was captured. The memo above is built from the page text only. To brief on the actual policy content, the PDF needs to be ingested and read; the page alone establishes the scope, the timing, and the structural stakes, but not Ofgem's specific position or the questions in their exact wording.