In this further policy consultation, we are seeking stakeholder views on our proposals to revise the parameters and methodology of the Earnings Before Interest and Tax (EBIT) allowance in the default tariff cap. This follows our initial policy consultation in August 2022 which sought views on our proposed review of returns suppliers receive via the EBIT allowance.
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. 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, over a wide range of market conditions.
We have considered stakeholder responses and undertaken further work and are 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. Consequently, we are proposing a bottom-up review of the parameters of the EBIT allowance, and changes to the implementation methodology.
The decision to issue a further policy consultation reflects the benefit of further gathering evidence on the different components of the EBIT allowance ahead of planned implementation of changes in July 2023.
Please send all responses by 5 January 2023, these can be submitted to Ofgem by emailing email@example.com.