Energy price cap: additional debt costs review decision

What changed

Ofgem has decided to apply a temporary adjustment to the default tariff cap to allow suppliers to recover additional debt-related costs incurred during the energy crisis, specifically between April 2022 and March 2024. The decision follows a December 2023 consultation and takes effect from 1 April 2024. The mechanism is a new "Annex 8" float adjustment — an upward addition to the cap level that will initially apply for 12 months, with a true-up process targeted for April 2025.

The core question was straightforward: the energy crisis drove bad debt and debt-related costs (write-offs, working capital costs, collections activity) well above the levels already embedded in the cap methodology. Suppliers argued these excess costs needed explicit recovery. Consumer groups argued suppliers should absorb them. Ofgem has sided largely with suppliers, creating a new allowance — but with a benchmarking approach that caps recovery at an efficient level rather than passing through each supplier's actual costs.

What this means in practice

All domestic consumers pay more. The adjustment adds directly to the cap level from Q2 2024 onwards. The exact £/customer figure depends on the benchmarking methodology in the Annex 8 spreadsheet, but the direction is unambiguous: bills go up to cover debts that accumulated during 2022-24.

The mechanism is a float, not a fixed allowance. This matters. A float adjustment means Ofgem is setting an initial estimate based on available data, with the intention of correcting it later through a true-up. Suppliers get cash flow now based on the estimate; the true-up in April 2025 will reconcile against actual efficient costs. If the float overshoots, consumers get a credit. If it undershoots, suppliers recover the remainder later. Either way, consumers bear the cost — the question is only timing.

Benchmarking limits what suppliers can recover. Ofgem is not passing through each supplier's actual debt costs. Instead, it has set a benchmark for "efficient" debt-related costs — meaning suppliers with worse-than-benchmark debt performance absorb the excess themselves. This is standard Ofgem practice (it mirrors how operating cost allowances work in RIIO price controls) and creates at least some incentive for suppliers to manage debt actively rather than socialise poor collections performance.

The period covered is April 2022 to March 2024. This is the crisis window. Energy prices spiked from autumn 2021, the price cap lagged behind wholesale costs through 2022, and consumer debt ballooned as bills outstripped ability to pay. By capping the recovery period at March 2024, Ofgem is treating this as a discrete crisis event rather than an ongoing structural problem — a reasonable framing, though one that may need revisiting if debt levels remain elevated beyond that window.

Suppliers who survived the crisis benefit most. The suppliers still operating are disproportionately those with the balance sheets to absorb two years of elevated bad debt. This adjustment retrospectively compensates them for costs they have already borne. Suppliers that failed during the crisis (Bulb, Avro, dozens of others) obviously receive nothing — their costs were mutualised through the Supplier of Last Resort levy, which consumers have already paid.

What happens next

Q2 2024 (1 April): The float adjustment applies to the cap. Every default tariff customer sees a marginally higher cap reflecting the debt cost allowance.

By April 2025: Ofgem aims to deliver the true-up process. This will reconcile the float against benchmarked actual costs, producing either a further upward or downward adjustment. The methodology for the true-up will need its own consultation — expect a further document in late 2024 or early 2025.

Ongoing cap methodology implications: This decision creates a precedent. If another price shock produces another spike in bad debt, suppliers will point to Annex 8 as the established mechanism for recovery. Ofgem has been careful to frame this as temporary and crisis-specific, but the methodology now exists and will be difficult to resist deploying again. The cap already contains multiple layered adjustments (headroom, EBIT margin, wholesale methodology changes); this adds another.

Wider context: This sits alongside the broader debate about whether the price cap methodology is fit for purpose post-crisis. The cap was designed for a stable wholesale market where the main consumer protection issue was supplier margin. It has been repeatedly retrofitted — backwardation adjustments, wholesale methodology changes, and now debt cost recovery — to handle a world where wholesale volatility, supplier failure, and mass consumer debt are the dominant problems. Each retrofit adds complexity and cost. The question Ofgem has not yet confronted is whether the cumulative weight of these adjustments means the cap is no longer doing what it was originally designed to do.