Ofgem Proposes £21 Increase to Price Cap to Offset Pandemic Debts

11 million households could see their annual energy bills rise by at least £21 next year, to offset bad debts accrued by suppliers during the pandemic.

Energy regulator Ofgem adjusts the energy price cap, which limits the amount suppliers can charge households on expensive default tariffs, twice a year, in April and October. Its formula for the cap accounts for fluctuating wholesale energy prices and supplier costs.

After tumbling energy demand during worldwide lockdowns sent wholesale prices plunging, the cap was cut to its lowest level yet in October: £1,042 for a dual-fuel household with typical use.

However, suppliers have raised the alarm about struggling households defaulting on utility bills, particularly as unemployment climbs. Utility bills are among the first things households stop paying when facing financial hardship, according to PwC, and suppliers are worried about shouldering high levels of unrecoverable debt.

Ofgem acknowledged these concerns in a statement released Friday. “Due to the impact of the pandemic and higher levels of unemployment we are seeing, more households are struggling to pay their supplier for the energy they have used. This is impacting on supplier finances and we expect the number of unpaid bills to rise this winter.”

It has signalled that these high levels of debt mean it may change the formula behind the price cap, adding at least £21 to households’ bills next April. The new ‘Adjustment Allowance’ would be in addition to any adjustment reflecting changing wholesale prices, which have risen since their nadir in the spring.

Anna Rossington, deputy director of Future Consumers & Retail Price Protection at Ofgem, said: “The existing price cap methodology includes an allowance for suppliers to recover the cost of bad debt expected in normal economic times. But the pandemic has resulted in anticipated bad debts rising to levels that aren’t covered by the cap.”

“This is why we are now considering whether these higher 'bad debt' costs for suppliers should be factored into the default tariff price cap when we next update it from 1 April 2021.”

Ofgem will consult on the new price cap formula until 21 December and will announce a decision in early February.