Bad debt REC adjustment model - February 2022

Bad debt Retail Exit Code price cap adjustment model - February 2022

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28th February, 2022




Business Retail Market


The bad debt Retail Exit Code price cap adjustment model calculates the appropriate uplift to the net and gross margins in the REC price caps to give Retailers additional pricing flexibility to recoup their portion of excess bad debt costs arising from 01 October 2019 to 31 March 2021. The model uses outturn customer bad debt costs of 2.87% of market turnover - this is calculated as a weighted average for the years 2019-20 and 2020-21. The model assumes that industry real revenue returns to pre-pandemic levels (2019-20 industry revenue) by the final forecast period 2023-24. The model incorporates the allowance of an efficient cost of financing bad debt of 3.5% (real terms) in its determination of the present value of an increase industry revenue from an uplift to REC price caps. The model specifies the REC price cap adjustment in constant price terms (2020-21 prices), using the annual CPIH index for October to adjust annual revenue forecasts accordingly. Details of our methodology are included in appendix A1 of the Bad debt February 2022 decision document (published on our website)