Ofgem is consulting on two changes to the way the energy price cap accounts for the cost of supporting low-carbon electricity. One would change the forecast used to calculate an allowance in the cap. The other would reflect funding linked to a government scheme for manufacturers.
The consultation opened on 2 November and concerns the household cap in England, Scotland and Wales. Neither proposal has been finalised, and the consultation itself does not change current bills. Responses are due by 20 November.
The regulator sought views on possible simplification in July, alongside a separate proposal on differences between forecast and actual generation. It has now put forward a specific quarterly calculation and recovery method, as well as the separate industrial-scheme adjustment.
How clean power costs enter the cap
The Contracts for Difference scheme supports low-carbon electricity projects through contracts with an agreed price for their output. When the relevant market reference price is below that price, the generator receives a top-up. When it is above the agreed price, the generator pays back the difference.
The costs or benefits of the scheme can feed through to consumers via their electricity suppliers. The domestic price cap includes an allowance for these costs in the calculation of maximum charges for customers on default tariffs.
The current allowance uses an annualised calculation based on a weighted average of four quarters of forecast payments. Ofgem proposes using the forecast for the coming quarter alone and recovering the resulting allowance over that same three-month period.
The regulator considers that the shorter calculation could make it easier for suppliers to manage their exposure to changing prices and could reduce some operational costs. Those are potential benefits of the method, not a confirmed reduction in household bills.
In feedback on the earlier consultation, five suppliers and one industry group supported simplification. Two suppliers also warned that concentrating trading activity in a shorter period could worsen existing market-liquidity difficulties if the market-price data used for the forecast came from a single day. They supported simplification alongside a three-month observation window.
The annualised method is intended partly to smooth seasonal changes. Ofgem’s analysis suggests that the allowance on its own could become more volatile under the proposed method, but that volatility in the overall wholesale-cost allowance could fall because wholesale-price movements and CfD costs can partly offset each other. The regulator sees no systematic reason for the simplified allowance always to be higher or lower.
Ofgem considers April to June 2027 the earliest price-cap period in which the simplified calculation could be introduced. The timing would depend on the arrangements needed and the consultation response, including how the calculation interacts with the observation window. A change to that window is not assumed.
How the manufacturing scheme fits in
The second proposal concerns the British Industrial Competitiveness Scheme, which is intended to reduce eligible manufacturers’ electricity costs. The planned exemptions cover certain Renewables Obligation and Feed-in Tariff costs from April 2027, with Capacity Market costs added from October 2027. They do not exempt manufacturers from the Contracts for Difference scheme itself.
Without measures to offset the effect, exempting some businesses could leave a greater share of those other scheme costs to be recovered from remaining electricity consumers, including households. The government intends to use a combination of wider energy-system savings and public funding to prevent those consumers paying more as a result.
The government has decided to proceed with amendments to the rules governing the CfD supplier obligation and plans to use the existing payment framework to deliver the public-funding offset. That decision is separate from Ofgem’s still-open consultation on the household price-cap calculation.
Ofgem’s proposal would deduct the forecast offset for the coming quarter from forecast CfD levy payments when calculating the allowance. The intention is to reflect the benefit of the funding for customers on default tariffs. The adjustment could be incorporated whether or not the separate simplification goes ahead.
If the change is agreed, Ofgem aims to introduce the offset in the April to June 2027 cap period. The consultation invites responses from suppliers, industry bodies, consumer groups and charities, as well as others interested in the calculation.
What it means for households
The price cap limits the amount suppliers can charge for energy units and standing charges on standard variable tariffs; it is not a ceiling on a household’s total bill. A household using more energy will generally pay more. Rates also vary with factors including location and payment method.
Fixed tariffs and business energy contracts are not protected by the default tariff cap. For households that are covered, the CfD allowance is one part of a wider calculation that also takes account of wholesale energy, networks and supplier operations. The outcome of this consultation alone cannot establish what a future bill will be.
