Ofwat to temporarily increase business retail price caps by 0.49% due to Covid-19 bad debts

28 Feb 2022 02:39 PM

Ofwat yesterday published its decision to temporarily increase price caps in the business retail market by 0.49%. This amendment allows retailers to share some of the unexpected bad debt costs that have arisen due to the Covid-19 pandemic with business customers.

Ofwat’s decision does not affect household customers.

The small and temporary amendment increases the maximum prices that retailers are allowed to charge business customers who are subject to price caps by 0.49%. This uplift has been recalculated from the 0.31% uplift consulted on in December 2021, to incorporate a proportion of bad debt costs reported by retailers during 2019/20. The uplift will take effect from April 2022 and last two years.

In April 2020, and in recognition of the unfolding Covid-19 pandemic, Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded levels which an efficient and prudent Retailer could reasonably have been expected to plan for – which it assessed as 2% of industry revenue. Following consultation, in July 2021 Ofwat agreed to allow a small and temporary uplift to the business retail price caps.

Georgina Mills, Business Retail Market Director at Ofwat yesterday said:

“During the pandemic, we have implemented measures to continue to protect the interests of business customers.

“Implementing this small and temporary upward adjustment to the business retail price caps aims to protect business customers, including by maintaining strong incentives on retailers to keep bad debt costs as low as possible.

Notes for Editors

• These amendments are in respect of retailers of water and wastewater services who serve business customers; they do not affect household customers.
• The amendments give retailers additional flexibility to increase a business customer’s total bill by 0.49%, where the business customer is subject to price caps set out in the Retail Exit Code (REC). Price caps do not apply to business customers who have actively agreed a contract with their retailer.
• For illustrative purposes, a small business customer (0-9 employees or <0.5Ml per year) with an average annual bill of £500 could be paying up to £2.45 more per annum.
• Bad debt costs relate to invoices or money owed that are unlikely to be recovered.
• You can view the Business retail market: Customer bad debt – Decision on adjustment to REC price caps from April 2022 here. 
• You can view the Bad debt Retail Exit Code price cap adjustment model – February 2022 here. 
• Ofwat consulted on the proposed amendments in December 2021. View the consultation document.
• Ofwat’s December 2021 PN – https://www.ofwat.gov.uk/pn-38-21-ofwat-proposes-a-small-and-temporary-adjustment-to-business-retail-price-caps-due-to-excess-covid-19-bad-debt-costs/
• Ofwat’s July 2021 PN – PN 22/21: COVID-19 and the business retail market – Ofwat makes final decisions on how to address increases in bad debt, and seeks views on three outstanding issues – Ofwat
• April 2020 Covid-19 and the business retail market: Proposals to address liquidity challenges and increases in bad debt – decision document
• July 2021 Decision and consultation
• October 2021 Update: Business retail market – Customer bad debt
• When Ofwat last reviewed the REC in 2018/19 it committed to conduct another review in 2-3 years’ time. Consistent with this, Ofwat is now conducting a wider review of REC price and non-price protections. Following its consultation in December 2021 – Business retail market: 2021-22 Review of the Retail Exit Code – Ofwat plans to consult on proposed changes in September 2022 and make decisions in December 2022.