This document confirms our decision to revise the parameters and methodology of the Earnings Before Interest and Tax (EBIT) allowance in the default tariff cap. This follows 3 rounds of consultation. We have considered stakeholder responses, gathered additional evidence and undertaken further analysis, and 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.
This decision confirms our proposal for altering the EBIT allowance methodology to a hybrid allowance such that is has a fixed component, that does not change when the cap is updated, and a variable component that scales with the overall cap level. This is based on a revised assessment of components, namely the capital employed and cost of capital.
Alongside this decision, we publish our updated working capital model and associated documentation, and modifications to gas and electricity supply licence conditions.
This decision will take effect on 1 October 2023, as part of the change in the default tariff cap level.