On Thursday 23 November 2023, Ofgem will announce the new level of the price cap, which will take effect on 1 January. This will happen in the usual way, except that Ofgem will be using a different Typical Domestic Consumption Value (TDCV) than it has done in the past. This will mean that the level of the price cap will not be directly comparable to previous price caps. This short briefing explains why this is, and the implications of a changed TDCV.
What is the TDCV and why does Ofgem need it?
The TDCV is an industry-standard value for the annual gas and electricity usage of a typical domestic consumer. The TDCVs are used to derive the typical bills quoted in the publication of price cap and Energy Price Guarantee (EPG) updates.
Ofgem needs to understand typical consumption so that things like policy costs can be recovered properly from the unit rate. If average consumption rates reduce, but the TDCV didn’t reduce with it, there would be a shortfall in the recovery of these costs from bills.
How is the TDCV changing?
The TDCVs are changing for both electricity and gas. For electricity, it will reduce from 2,900kwh/year to 2,700kwh/year. For gas, it will reduce from 12,000kwh/year to 11,500kwh/year.
Why has the TDCV reduced?
There are two main reasons why the TDCV has been reduced.
Firstly, because there have been legitimate efficiency gains in UK households, through making the fabric of homes more energy efficient, and through white goods becoming more efficient over time.
Secondly, and more worryingly, demand has reduced over the last two years as households have rationed their energy in response to high energy prices. For example, polling conducted by National Energy Action (NEA) and Birmingham University found that 81% said they rationed energy that winter, while 55% rationed hot water and 13% had reduced the use of powered medical equipment at home in response to high prices
Additionally, the ONS has shown that ~30% in the winter that Ofgem is using to measure usage (21/22)
What impact will this have on the price cap?
Lower TDCVs will likely artificially result in a lower number that will be reported as the price cap level, even if prices increase. Cornwall Insight is predicting a new cap of £1,931 using the new TDCV level. This equates to a cap of £2,025 at the previous TDCV level.