Backwardation allowance

Ofgem sets the wholesale part of the price cap in two steps. First it works out what it costs to buy a full year of energy. Then it works out what it costs to buy energy for just the coming quarter. When the quarter costs more than the year, the difference is called backwardation and is a cost to suppliers. When it costs less, the difference is called contango and is a benefit. The backwardation allowance is the part of the cap that passes that difference through.

The deadband

Swings between quarters can be large, so Ofgem put a threshold on the allowance, called a deadband. It is £9 for a dual fuel home each quarter, £4 for electricity and £5 for gas, the same in both directions. The first £9 of any cost or benefit was not passed through to customers at all. If backwardation came to £15, only £6 went into the cap, and the same for contango. Anything beyond the deadband was recovered over six months. Ofgem set the £9 from the spread of backwardation in the cap periods before the energy crisis, January 2019 to September 2021.

The November 2025 decision

On 21 November 2025 Ofgem decided to remove the deadband, from the July to September 2026 cap period. From then, the amount that used to sit inside the deadband is recovered over a rolling 12 months, so it does not cause big jumps between quarters, while anything beyond it is still recovered over six months. The change only looks forward: amounts that fell inside the deadband before July 2026 are not recovered.

Key facts:

• Deadband: £9 a quarter for a dual fuel home (£4 electricity, £5 gas), in both directions
• Before July 2026, amounts inside the deadband were not passed through
• From the July to September 2026 cap period, those amounts are recovered over a rolling 12 months
• Amounts beyond the deadband are recovered over six months
• Source: Ofgem, Backwardation wholesale allowance in the default tariff cap, decision of 21 November 2025

EnergyCode includes the backwardation allowance in its Ofgem Price Cap Prediction.