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04 Aug 2022
UK Electric Utilities: £4,000+ tariff cap in January?
Centrica plc (CNA:LON), 129 | Drax Group plc (DRX:LON), 524 | Good Energy Group PLC (GOOD:LON), 255 | National Grid plc (NG:LON), 0 | SSE plc (SSE:LON), 0
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UK Electric Utilities: £4,000+ tariff cap in January?
Centrica plc (CNA:LON), 129 | Drax Group plc (DRX:LON), 524 | Good Energy Group PLC (GOOD:LON), 255 | National Grid plc (NG:LON), 0 | SSE plc (SSE:LON), 0
- Published:
04 Aug 2022 -
Author:
Martin Young -
Pages:
6
Ofgem published a number of decisions this morning in relation to the energy tariff cap, a number of which have a material impact on our estimates.
Unexpected SVT demand costs incurred in cap period eight will be recovered through the adjustment allowance in the amounts of £15.57 for electricity and £23.38 for gas. Backwardation costs for cap period seven (April 2022) were revisited, and an uplift of £6 per customer will be applied via the adjustment allowance.
As expected, Ofgem has decided to move to quarterly updates, with the price cap for October 2022 to be announced on 26th August, and the price cap for January 2023 to be announced on 24th November.
In May, Ofgem consulted on updating the wholesale methodology to include backwardation costs, with a proposal to model these ex-ante, and recover these over a twelve-month period. The decision taken is to model ex-ante, but to recover over a six-month period.
Based on 19th July prices, Ofgem has estimated a £271 backwardation cost per dual fuel customer over winter, and indicated that moving to a six-month recovery period increases the backwardation costs in the cap by approximately 60% in cap period 9a (October) and 75% in cap period 9b (January).
Ofgem’s view is that the “shorter recovery period reduces the risk of supplier failure and the potential irrecoverable supplier exit costs that customers would pay if we saw further exit over winter.”
Our updated modelling, based on prices as of 4th August, is that backwardation costs (post deadband) are slightly higher at c.£296 per dual fuel customer, which given the aforementioned comment as to the cap impact of six-month recovery, we believe will have a material impact on the level of the cap, particularly in January 2023.
Within our cap estimates, we include backwardation components of c.£131 for October, and c.£504 for January. We suggest that the latter is not inconsistent with Ofgem’s indication that a six-month recovery would push up backwardation costs in the cap period 9b by approximately 75%.
Although ultimately a cashflow timing change, it is a material contributor to our higher cap estimates, which now stand at £3,523 for October, and £4,210 for January (see Figure 1). Comparing our estimates with our previous position, the increased backwardation component alone accounts for c.£350 (pre-VAT).
At c.£427 per month for winter consumption, the pressure on stretched households will only intensify, and the calls for support will get ever louder. It is blatantly obvious that what is on the table is not enough.
Things have changed. Rishi Sunak and Liz Truss need to get together and agree a common position, and communicate it before the month is out.