How often does Ofgem update the wholesale cost allowance?

Ofgem updates the wholesale cost allowance quarterly — in January, April, July, and October — as part of each full price cap review. Each update uses a reference window of approximately 3–6 months of observed forward contract prices in the gas and electricity wholesale markets. This means there is always a lag between spot market movements and changes in what consumers actually pay.

What percentage of my energy bill is the wholesale cost allowance?

The wholesale cost allowance is typically the largest single cost component in the Ofgem price cap, representing roughly 30–50% of a typical household bill, though this proportion fluctuates with market conditions. In periods of very high wholesale prices (like 2021–2023), the wholesale share can dominate the bill structure. Ofgem's quarterly publications break down each component as a share of the total unit rate.

Why did energy bills stay high after wholesale prices fell?

The reference window lag means wholesale price reductions take 3–6 months to fully feed through to consumer bills. Ofgem calculates the wholesale allowance based on average forward contract prices in the months before each quarterly cap review, not real-time spot prices. During the 2022–2023 energy crisis, UK wholesale prices fell significantly by early 2023, but bills remained elevated through multiple quarterly reviews as the lagged reference window gradually reflected the lower prices.

Do energy suppliers keep the difference if wholesale prices are below the allowance?

In theory, yes — if actual wholesale costs fall below the Ofgem allowance, suppliers may retain a margin above their actual costs. Ofgem monitors this through ongoing price cap reviews and has signaled willingness to adjust the methodology. However, the opposite risk also exists: if prices spike above the allowance (as in 2021–2022), suppliers absorb the loss or face insolvency (many UK suppliers did collapse during this period).

Ofgem Wholesale Cost Allowance: How It Works and What It Means for Your Bill

Understand how Ofgem's wholesale cost allowance is set, how it translates to the unit rate and standing charge in your energy tariff, and why wholesale prices affect what you pay.

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What Is the Ofgem Wholesale Cost Allowance?

The Ofgem Wholesale Cost Allowance is the portion of the energy price cap that accounts for the cost energy suppliers pay to buy gas and electricity from wholesale energy markets. It is the largest single component of the price cap, typically representing 30–50% of a typical household's total bill.

How the Price Cap Is Built

Ofgem's energy price cap (officially the Default Tariff Cap) is constructed from several stacked cost components:

Component	Description
Wholesale Costs	Cost to purchase gas and electricity wholesale
Network Costs	Transmission and distribution infrastructure
VAT	5% on domestic energy
Operating Costs	Supplier overhead and customer service
Policy Costs (levies)	Renewable obligation, smart meter rollout, etc.
Return Allowance	Permitted profit margin for suppliers
Bad Debt Allowance	Estimated non-payment costs

The wholesale cost allowance is derived from observed market prices for gas and electricity over a reference period typically a few months before the price cap quarter begins.

How Ofgem Calculates the Wholesale Allowance

Ofgem uses a hedging methodology to estimate what a notional efficient supplier would pay for energy: 1. Ofgem observes average forward contract prices in the gas and electricity markets 2. These are averaged over a defined reference window (typically the preceding 3–6 months) 3. The result is a per-MWh cost that is converted into a pence-per-kWh figure for both gas and electricity 4. This figure becomes the allowance — what suppliers may charge customers to recoup wholesale costs

If actual market prices spike above the allowance (as occurred in 2021–2022), suppliers can face financial losses. If prices fall below the allowance, suppliers gain a windfall — Ofgem monitors this through the price cap review cycle.

Worked Example

Suppose the gas wholesale price averages £75/MWh during the reference period:

Conversion: £75/MWh = 7.5p/kWh (gas)
Adding a small inefficiency allowance: ~7.8p/kWh
This becomes the gas wholesale cost component in the price cap unit rate

The electricity wholesale component is calculated similarly but from electricity forward contracts, which often move in line with gas prices (because gas peakers set the marginal electricity price in the UK grid).

Why Does This Matter for Consumers?

Understanding the wholesale allowance explains: - Why energy bills spike when global gas prices rise — the allowance reflects market realities - Why bills don't immediately drop after wholesale prices fall — the reference window creates a lag - Why supplier profitability varies — if they hedged below the allowance they profit; above it they lose

The Quarterly Review Cycle

Ofgem reviews and resets the price cap each quarter (January, April, July, October). Each reset uses a fresh reference window, meaning: - Rapidly rising prices take 3–6 months to fully feed through to consumer bills - Rapidly falling prices also lag before providing bill relief - Households on fixed tariffs are insulated from these fluctuations for the duration of the fix

Related Guides

Frequently Asked Questions

How often does Ofgem update the wholesale cost allowance?: Ofgem updates the wholesale cost allowance quarterly — in January, April, July, and October — as part of each full price cap review. Each update uses a reference window of approximately 3–6 months of observed forward contract prices in the gas and electricity wholesale markets. This means there is always a lag between spot market movements and changes in what consumers actually pay.
What percentage of my energy bill is the wholesale cost allowance?: The wholesale cost allowance is typically the largest single cost component in the Ofgem price cap, representing roughly 30–50% of a typical household bill, though this proportion fluctuates with market conditions. In periods of very high wholesale prices (like 2021–2023), the wholesale share can dominate the bill structure. Ofgem's quarterly publications break down each component as a share of the total unit rate.
Why did energy bills stay high after wholesale prices fell?: The reference window lag means wholesale price reductions take 3–6 months to fully feed through to consumer bills. Ofgem calculates the wholesale allowance based on average forward contract prices in the months before each quarterly cap review, not real-time spot prices. During the 2022–2023 energy crisis, UK wholesale prices fell significantly by early 2023, but bills remained elevated through multiple quarterly reviews as the lagged reference window gradually reflected the lower prices.
Do energy suppliers keep the difference if wholesale prices are below the allowance?: In theory, yes — if actual wholesale costs fall below the Ofgem allowance, suppliers may retain a margin above their actual costs. Ofgem monitors this through ongoing price cap reviews and has signaled willingness to adjust the methodology. However, the opposite risk also exists: if prices spike above the allowance (as in 2021–2022), suppliers absorb the loss or face insolvency (many UK suppliers did collapse during this period).

Last updated 7/28/2026