Bad debt unlikely to be covered in next energy price cap

It would mean energy bills for customers on variable tariffs or pre-payment meters wouldn't pay extra to safeguard against other customers defaulting on their debts.

The current price cap which has been in force since 1 April 2021 included a £23 allowance to protect energy companies against bad debt.

Ofgem will make a final decision in August ahead of the next cap period beginning on 1 October 2021.

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Debt-related costs

The crux of Ofgem's decision rests on the fact that suppliers' forecasts of their debt-related costs for the period between 1 October 2021 and 31 March 2022 isn't much greater than pre-Covid levels.

They don't expect suppliers to incur much in the way of additional costs related to bad debt within that cap period, and so they are proposing a bad debt allowance should not be added to the next cap calculation.

In response to a working paper published in March, four stakeholders said an allowance was unnecessary while one believed it would be necessary and a further stakeholder said any allowance would be based on speculation.

Ofgem have now opened the matter for consultation and expect to publish a final decision on the matter at the beginning of August.

Customer bills

Right now, we don't know what the energy price cap will be set at from October onwards, but these proposals will likely shave around £20 from the total cap amount.

The default energy cap and pre-payment meter cap don't set the maximum that customers will pay on their energy bills during the year. Instead, it caps the amount energy suppliers can charge per unit of gas and electricity.

This tends to rise and fall primarily in line with the wholesale costs of energy, but the last cap also included a £23 allowance to cover suppliers if other customers failed to pay their outstanding debts due to the ongoing coronavirus crisis.

Essentially, customers were being told to pay a little extra in the anticipation that some others wouldn't be able to pay their bills, something that seemed probable in December when Citizens Advice research revealed 600,000 additional households had been pushed into energy debt since the pandemic began.

Falling behind on utility bills is common for people struggling with debt - research from debt charity StepChange published last month found 35% of customers in arrears had fallen behind on their electricity bills while 25% had fallen behind with their gas bills.

Energy sector

This time last year, energy suppliers were pressing Ofgem to include a bad debt allowance in the October 2020 price cap, but the regulator didn't think the evidence pointed to it.

They revised their opinion ahead of the April 2021 cap adjustment, yet their current view is that debt-related forecasts from suppliers don't indicate major problems ahead.

Their estimates suggest suppliers will experience bad debt costs of approximately £0.04 per customer credit account, something Ofgem believe doesn't count as a material increase.

Overall, they also think the UK economy is recovering quickly and there is no evidence of a structural break that would increase material additional costs for suppliers.

Ofgem say there is no evidence that the financial resilience of customers has worsened since October 2020. Previous research from the Financial Conduct Authority (FCA) found an extra 3.5 million adults could be classed as having low financial resilience in October 2020 compared with February 2020.