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Market research & Insight

Issue 914 | Cost Pass-Through tariffs research

Ellie Procter Ellie Procter Year in Industry

Ofgem Research Report: Cost Pass-Through (CPT) Tariff Electricity and Gas Alert 31 July 2019 Elli Procter   Headline Assessment   1 Assessment & recommendation Ofgem published the findings of analysis it conducted into the possible benefits of cost-pass through (CPT) tariffs on 17 July. These would see wholesale costs passed through to customers in close to real time, rather than suppliers hedging their wholesale position. This indicates that CPT tariffs will provide lower but more volatile prices when compared to those of Standard Variable Tariffs (SVTs). The regulator developed a “backcast” model which suggested a typical dual fuel consumer would have saved £62/year under the CPT arrangement. Savings were primarily driven by the lower wholesale costs due to the removal of hedging-related costs. Additionally, Ofgem investigated financial savings under CACI’s Acorn consumer classification groups (Affluent, Comfortable and Adversity), producing potential savings ranging between £7-18/year. The regulator also noted that customers would benefit from improved transparency under the CPT tariff, as the tariff allows for a full pass through of upstream costs, compared with hedging strategies and opaque pricing adopted by suppliers for SVT customers. On the downside, wholesale costs will be passed through to customers in close to real time, which would induce a considerably higher price volatility. The model highlighted that in some years of high gas price volatility a customer may have been worse off by hundreds of pounds. It was also emphasised that a more risk averse, potentially vulnerable consumer, is likely to be ...

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