Energy price cap: earnings before interest and taxes (EBIT) allowance methodology update

Proposed change 

The energy price cap includes an allowance for Earnings Before Interest and Tax (EBIT). As part of the annual update of the EBIT allowance, we refresh a range of external data inputs used within the methodology. One of the inputs used in this calculation relates to the Retail Prices Index (RPI), which is being aligned with the Consumer Prices Index including owner occupiers' housing costs (CPIH) from 2030. 

Because of this change, one of the inputs we would ordinarily use in setting the EBIT allowance (the RPI-CPI wedge) is no longer appropriate to use, as it would now be significantly affected by the planned reform of RPI from 2030 rather than prevailing market conditions. 

 We are publishing this note in the interests of transparency to set out our intended approach for calculating the EBIT allowance from 1 October 2026, which we will announce later in August.  

Previous approach  

The Office for Budget Responsibility (OBR) publishes forecasts of RPI and CPI on their website. An ‘RPI-CPI wedge’ used in our EBIT allowance is the difference between the two measures of inflation at a given point in time. The purpose of the RPI-CPI wedge is to convert RPI-indexed gilt yields, which are used as part of our assessment of the risk-free rate, into a consistent inflation measure for use within the EBIT calculation.  

Historically, we have used a RPI-CPI wedge estimate by taking the difference between the CPI and RPI measures for a single year, 5 years ahead. However, this means we would now be using 2030 inflation numbers, which are impacted by the government decision to no longer use RPI as an official metric.  

Proposed change to the approach 

We consider the most appropriate solution in the near term is to use a 5-year average of the RPI-CPI wedge from the period of 2026 to 2030 for this purpose. We consider this approach provides a more stable and representative estimate of the long-run RPI-CPI wedge and avoids a sudden step change in our input assumptions driven by the planned reform of RPI from 2030.  

At present, the RPI-CPI wedge is 0.82%. The latest OBR forecast data available suggests a 5-year average RPI-CPI wedge across 2026 to 2030 is 0.73%.   

This change affects only which RPI-CPI wedge input we are selecting for our EBIT calculation for the upcoming announcement. No changes are being made to the EBIT methodology itself or the structure of the model. 

Future review 

We intend to apply this revised approach in the price cap from 1 October 2026 on an interim basis. However, we will further review the implications of the 2030 government RPI changes on the price cap this winter to determine whether further changes, including to the methodology of the price cap itself might be appropriate on an enduring basis. We will set out more detail on this review in the coming months.  

Stakeholder views 

We welcome stakeholder views on this proposed change. 

Please send any comments to RetailPriceRegulation@ofgem.gov.uk by Friday 14 August 2026.