In this statutory consultation, we are seeking stakeholder views on our proposals to revise the parameters and methodology of the Earnings Before Interest and Tax (EBIT) allowance in the default tariff cap. This follows our initial policy consultation in August 2022 and further policy consultation in November 2022.
A flat EBIT margin of 1.9% is currently applied to the other allowances within the price cap and consequently the EBIT allowance in the cap scales with customer bills. We have considered stakeholder responses, gathered additional evidence and undertaken further work and analysis. We remain of the view that the market and the regulatory environment in which suppliers operate has significantly changed since the EBIT allowance was initially set in 2018.
Consequently, we are proposing a hybrid allowance, with a fixed component and a variable component, based on a revised assessment of the capital employed and cost of capital. The consultation outlines an indicative EBIT allowance level for price cap period 11a (October-December 2023), and the approach we are minded to apply for quarterly cap updates.
Alongside this consultation, we publish a suite of documents including a working capital model and associated documentation, proposed amendments to gas and electricity supply licence conditions and proposed change to the EBIT element in the underlying default tariff cap model.
Subject to this statutory consultation, planned implementation of changes would take effect in October 2023.
Please send all responses by 28 June 2023, these can be submitted to Ofgem by emailing priceprotectionpolicy@ofgem.gov.uk.
A recording of the Investor Relations call held on 25 May 2023 is available below: