Ofgem proposes to update EBIT allowance input to reflect RPI reform taking effect in February 2030

Ofgem has opened a consultation proposing to revise a single input within the energy price cap's earnings before interest and taxes (EBIT) allowance calculation, citing the UK Statistics Authority's confirmed plan to align the Retail Prices Index with CPIH in February 2030^[1]. The change is described as a methodology update rather than a policy reset, but it touches the mechanism that determines how much profit GB domestic energy suppliers are permitted to earn under the cap.

What the EBIT allowance does

The EBIT allowance is the component of the default tariff cap that sets a permitted profit margin for an efficient notional supplier. The cap protects customers by ensuring that an efficient supplier can recover its costs and earn a modest level of profit. The level of return allowed through the cap can affect customers in the short term via near-term prices and in the longer term via investment in the sector.

Ofgem last overhauled the allowance's structure in October 2023, moving from a flat percentage margin to a hybrid design. The revised approach introduced a fixed component and a variable component, based on a revised assessment of the capital employed and cost of capital. Ofgem sets a profit margin allowance in the price cap through the EBIT allowance, which was increased in 2023; since then, significant discounts have been offered compared to the price cap in 2025 and switching has picked up.

Why RPI reform matters for the calculation

The specific input Ofgem now wants to update is linked to the planned reform of the Retail Prices Index. The ONS's current plans are to address the shortcomings of RPI by bringing the methods and data sources from CPIH into the RPI in February 2030. The planned reform will not take effect until 2030 in order to minimise the impact on the holders of index-linked gilts, which include many pension funds.

The practical consequence for any RPI-linked input is a downward shift in the implied inflation rate. From 2030, the RPI measure of inflation is likely to be lower than it would otherwise have been by an average of one percent per annum, dependent on the economic climate. Because the EBIT allowance calculation incorporates a cost-of-capital estimate that draws on market-implied inflation data, an input calibrated to pre-reform RPI levels would become stale once the index changes. Ofgem's proposal is to update that input now, ahead of the 2030 implementation date, so that the allowance does not embed an upward bias into supplier returns^[1].

What Ofgem is and is not changing

The proposal is narrow in scope. The key points are:

• Only one input within the existing EBIT methodology is being revised - the broader hybrid fixed/variable structure introduced in October 2023 is not being reopened.
• The trigger is a statistical reform already confirmed by the UK Statistics Authority, not a reassessment of supplier profitability or market conditions.
• Ofgem has framed this as a technical update, consistent with its obligation to keep price cap inputs current as external reference data evolves^[1].

The current price cap stands at £1,862 per year for a typical dual-fuel household paying by direct debit, a level set for the period 1 July to 30 September 2026. Ofgem announced a 13% increase of the energy price cap for the period covering 1 July to 30 September 2026.

What to watch

The consultation response deadline has not yet been published on the Ofgem page. Stakeholders to watch include energy suppliers and consumer groups, both of which have historically engaged closely on EBIT methodology changes. The more consequential question - whether the EBIT allowance level itself remains appropriate as the retail market stabilises - is a separate workstream and is not addressed by this proposal.