In this initial policy consultation, we are seeking stakeholder views on what the appropriate Earnings Before Interest and Tax (EBIT) allowance should be and what the appropriate approach to implement the EBIT allowance in the price cap should be. This is to ensure the EBIT allowance in the cap remains appropriate over a wider range of market conditions.
A flat EBIT margin of 1.9% is currently applied to the other allowances within the cap and consequently the EBIT allowance in the cap scales with customer bills. This may result in profits being unduly high in a high-price and high-cost environment, which is why we are consulting on alternative approaches to ensure the EBIT allowance in the cap remains appropriate over a wider range of market conditions.
Given the recent increase in energy prices and volatility, it is important we consider whether the current EBIT allowance continues to be appropriate for customers. It is in customers’ interests that the allowed return strikes a balance between near-term price protection and encouraging investment in the sector, which benefits customers in the longer term.
Please send all responses by 23 September 2022, these can be submitted to Ofgem by emailing firstname.lastname@example.org.