How we can offer affordable tariffs during a crisis

The second email you’ll ever receive as an Octopus Energy customer is from me. It talks about how I set Octopus up to be different. How we work to do better by customers.

Six years after I wrote these words, I’m proud to say we’ve done what I said we would. Customers with us since the beginning would’ve typically saved over £1,000 (these are customers who joined us in 2016 on our very first Fixed tariff and then moved to our Flexible Octopus for the next 4 years vs doing the same thing with one of the original Big 6 companies: British Gas, E.ON, EDF Energy, Scottish Power or Ovo Energy). We’re one of the UK’s top brands for customer service, and we’ve taken our sound energy saving advice to new levels this Winter to save customers millions on gas bills.

We still work hard to be honest and transparent at all times. That’s why I have to tell you about one way we have changed from what I wrote back then.

We have, today, launched a new tariff that does have an early exit fee, alongside all our usual tariffs without one.

I wanted to explain the reason why.

We’re in a once-in-a-generation energy crisis. The last time prices spiked like this was in the 1970s. Gas prices have shot up due to a cocktail of global factors, from geopolitical tensions to extreme weather conditions.

It’s left the UK with a £20 billion gas bill.

Energy companies have been swallowing the debt for the past six months. Energy margins are slim to begin with (we usually make around 5% on a typical customer and that all goes towards our operating costs). In the past few months, we’ve spent £100 million to cover the higher energy costs and keep customers’ bills as low as possible.

We’re fortunate to be in a position where we can take that hit. The majority of other energy companies aren’t. 27 suppliers went bust in 2021; that’s half of the retailers in the market.

This displaced over 6 million customers, leaving them at the mercy of complex, costly emergency processes to move them to a different supplier.

Throughout all this, the energy price cap has been a crucial protection for customers on default tariffs. Recently, Ofgem announced that the maximum cap would rise by nearly £700, impacting around 22 million households.

We know these bills are untenable for so many people. I’ve been talking to the government for months about the best way to support customers through this: everything from spreading costs over a number of years, removing the environmental levies and VAT from gas, or even extending the £140 Warm Home Discount to more people. The government's since announced a first solution, and I hope there might be more to come.

At the same time we’ve been helping our customers directly. We created a £2.5 million Financial Hardship Fund for those struggling the most, and even run free schemes like loaning thermal cameras to spot heat loss in the home. Our team has around 30,000 conversations with customers every day, and they’re trained to identify people who’d benefit most. And we've built a simple tool that means any customer can find and access help that's available to them.

In the current crisis, we can make energy more affordable right now by buying long-term wholesale contracts on your behalf.

So, as well as our usual 12 month fixed tariff with no exit fees, we’ll be trialling a longer fixed tariff for 36 months too. In uncertain times, we just don’t know where energy prices will go from here. But we do know an increasing number of people simply can't afford any more rises.

This requires us to buy three years’ worth of energy up front. In a recent blog our Director of Product Rebecca used the analogy of a ‘baked bean subscription’ to explain how energy buying works. I’ll borrow it here to explain why it means we need to add an early exit fee to these longer term tariffs:

Say you sign up for a subscription of monthly baked bean deliveries over three years, for the same price every month. Your baked bean seller needs to make sure they can always afford to give you the beans for the agreed-upon price. So, they buy all your beans for those three years up front, and store them for you in a warehouse for when you need them. That means if you leave your contract early, and decide to get beans from someone else, the seller is left with all those beans. They could sell your beans to someone else, but now, the beans are worth much less on the market, so they’ll sell them at a massive loss.

Now imagine that instead of beans, it’s energy, worth £2,000 per year for every customer, and multiply that by potentially 3 million accounts.

We need to add an early exit fee for this long-term tariff so that if you decide to leave mid-contract, we can recoup some of the costs we’ve already spent on your behalf. That’s why, on our 36 month Octopus Fixed tariff, the early exit fee starts at £150 per fuel in year one, and will reduce by £50 every year you stay on the tariff. The early exit fee will apply if you choose another tariff from us, or switch to another supplier.

These tariffs won’t be right for everyone, and of course we’ll keep offering regular 12 month fixed and flexible tariffs without exit fees priced as affordably as possible.