Average retail allowances to rise by a third under Ofwat’s final retail price cap decisions

Ofwat has settled on significantly higher retail price caps from April 2023 for small customers who have not contracted with a supplier than it consulted on in September.

Its Retail Exit Code decisions, published last week, set out new price protections for Group 1 customers (users of less than 0.5Ml/year), who remain on default tariffs. Ofwat locked in the idea of an England-wide national price cap specified as a ‘total retail allowance’ for each unique service provided by a retailer, to replace the current arrangements whereby cost allowances and margins differ by wholesale region and tariff type.

The total retail allowance will comprise in each case a retail allowed cost to serve (ACTS), plus a bad debt allowance, plus an allowed net margin. Where water services are measured, an additional meter reading cost allowance will be added.

Under the draft proposals, average retail allowances across all regions in England were set to increase by around 0.5% before inflation, leading to an increase of 0.1% to an average metered customer bill. However, under the final proposals, average retail allowances will go up by around a third, leading to final bills for business customers on a dual (water and wastewater) metered tariff increasing by around 6.4%, before inflation.

Ofwat increased its calculation of running costs, meter reading allowances and bad debt allowances, but kept allowances for fees and water efficiency, and the allowed net margin, the same as in the draft proposals. It attributed the cost allowance rises to new data from retailers that had emerged since the consultation and error correction; it said it had not changed its methodology or changed its approach, despite calls from retailers for it to do so.

The regulator said the change in price caps will enable efficient retailers to earn a fair return whilst supporting the long-term stability of the business retail market that will benefit customers.

To reduce the risk of bill shocks for customers from the incidence effects of moving to a single nationwide allowance, Ofwat will transition the introduction of the new price caps over a two-year period, including by limiting annual changes in customers' retail charges to no more £60 per year, before inflation.

The price caps will next be reviewed in three to five years' time.