7th August 2017
A beginner's guide to buying energy
Chris Roper, Writer
There’s a lot to get your head around in the energy industry. Kilowatt hours, unit prices, standing charges, tariffs – what does it all mean?
While we try to make buying energy as simple as buying cornflakes, the jargon and complexity of the industry often get in the way.
To help, we’ve put together a short guide that explains the basics, from choosing a tariff to understanding your usage.
Let’s start at the beginning.
How does the energy market work?
The energy market is made of 3 parts:
Energy suppliers – like us, or a Big Six supplier like British Gas.
Energy generators – wind farms, solar farms, nuclear, gas, and so on.
Infrastructure managers – pipes, pylons, and cables, balancing supply and demand, platforms for the trade of energy and managing its delivery into your home.
We’re an energy supplier. That means we buy energy on your behalf from the generators and manage all the tricky aspects of the industry – like liaising with generators, infrastructure managers, and the regulator – so you don’t have to get involved. Many suppliers supply both gas and electricity, but some only supply one.
How do we measure the energy you use?
Whether it’s electricity or gas, a meter connected to your home records your energy usage in units.
A unit of electricity is measured as a kilowatt hour, written as kWh.
1 kWh means you’ve used the equivalent power of 1,000 watts over one hour.
The more energy you use, the higher the number of kWh.
An example: Boiling a kettle
If your kettle has a 2 kW power rating, then if you turn it on continually for one hour it’ll use 2 kWh. But kettles are rarely used that long, normally just 3 minutes – which is 1/20th of an hour. So, your 2 kW kettle uses 1/20th x 2kW = 0.1 kWh. (The actual figure will vary depending on how much water is the kettle.)
How do we charge for the energy you use?
All energy suppliers charge you in the same way:
We charge a unit rate which is the amount you pay for each kWh you use.
We charge a standing charge which is a daily rate for having an energy supply. This pays for getting the energy from the generators all along the wires and into your home, which we have to pay whether you use any energy or not.
Using the kettle example above, the price calculation would be:
Your energy charges = (0.1 kWh x unit rate) + daily standing charge
The unit rate and standing charge you pay depend on two things:
Where you live – unit rates and standing charges vary geographically to reflect how simple or complex it is to supply your area.
The tariff you’ve chosen (you can take a look at all our available tariffs on our tariff page)
Hang on, what’s a tariff?
A tariff sets the unit rates and standing charges for your energy supply, and they typically come in two types:
A variable tariff means your unit rates and standing charges change when the wholesale cost of energy changes. If you’d like your energy prices to move with the wholesale market, which means it could go up and well as down, this is the type of tariff for you.
Most variable tariffs change a handful of times a year – with some suppliers quick to raise prices when wholesale costs increase, but slow to reduce them when they fall.
In May, we released Octopus Tracker, the UK's first variable tariff to change with the wholesale price on a daily basis, so you can enjoy reductions as they happen (or increases – wholesale prices go up as well as down).
A fixed tariff means your unit rates and standing charges are fixed for a certain period, normally 12 or 18 months (but can be longer). During your fixed term period, your supplier can’t change your unit rates or standing charges.
Once you’ve chosen the type of tariff you want, the next step is deciding if it offers you good value. You can do this by comparing your unit rates and standing charges with how much energy you normally use.
How will my usage affect what I pay?
Normally, energy suppliers and price comparison websites estimate the cost of supplying you energy over a 12 month period – regardless of whether you’ve chosen a fixed or variable tariff. This gives you an estimated monthly cost as well as an annual total for the energy you’re expected to use.
To do this, we ask you to estimate how much energy you’ll use for the year, which you can do in the following ways:
1. Using an old bill
Ideally, you want to give your energy supplier an old bill, as this will show your Estimated Annual Consumption (EAC). This figure is a sophisticated estimate based on the meter readings you gave your current supplier, and will be the most accurate estimate.
2. Using Ofgem’s low, medium, high usage values
Ofgem, the energy regulator, compiles a list of the low, medium, and high annual energy consumption values. These are based on UK median data taken over a two year period.
When you don’t have a bill, these are the next best thing (but won't be as accurate). Some energy suppliers and price comparison websites estimate your usage by asking you about the type of home you have, the number of occupants, and so on.
3. An estimate that you give us
If you have a good idea of how much energy you use in a year, we can use values that you give us. This is good for people who keep a close eye on their energy usage.
Once we have an estimate for your annual usage, we can estimate how much you’ll pay for energy.
How much will I pay?
How much you pay depends on:
1. How much energy you use
2. The unit rates and standing charges for your tariff
For our Super Green tariff in the London area, we charge 12.87p per unit electricity, with a daily standing charge of 21p.
If your usage is roughly similar to Ofgem’s medium values (for homes that have around 3 bedrooms, 3-5 occupants, and perhaps one or more home during the day) then your estimated electricity consumption for the year would be 3,100 kWh.
Therefore, your quote for the year would be:
(3,100 x 12.87) + (365 x 21) = 39,897 + 7,665 = £475.62
IMPORTANT: Estimates are just that – estimates. If your actual usage is more or less than estimated, the amount you pay for the year might be higher or lower. Whatever happens, we regularly monitor your usage and will let you know if we think it’s too different to what we expected.
How do I pay?
We don’t expect you to pay for your annual energy usage upfront. Instead, we ask that all our customers pay by monthly Direct Debit.
We calculate your monthly payment by dividing your annual quote by 12. Using the example above, your monthly payments would be around £40. Your energy payments are added to your account, and every month, we deduct the cost of what you’ve used from this pot.
Your usage will vary with the seasons (you’ll use more in winter than in summer), but our aim is have your energy account at zero by the end of the 12 months, meaning you don’t owe us money, and we don’t owe you money. In effect, you’ve paid for exactly what you’ve used.
This doesn’t always work out, though.
If you’ve underestimated your usage for the year, then you could end up with a debit balance. If you’ve overestimated, you could be in credit. Regular meter readings help avoid building up credits or debits – we’ll keep an eye on your account to make sure it’s on the right track.
Will the amount I pay ever change?
1. If you’re using more than you thought you would
To avoid building up a big debit by the end of the year, we might ask you to increase your monthly payments to make up the difference between what we estimated and your actual usage.
2. If you’re using less than you thought you would
We recommend you keep credits built up over the summer to offset your higher usage in winter – usually 1-2 months credit will see you through the colder months. But if you’re worried about your credit balance, we can give you a refund or lower your monthly payments to even things out a bit.
3. If you’re on a variable tariff
Being on a variable tariff means your unit rates and standing charges will move with the wholesale cost of energy (the cost to us of buying energy on your behalf). This means your tariff could change midway through the year – either up or down – which might affect your monthly payments. We always give 30 days notice of any price rise, and 5 days of any price reduction.
4. If your fixed tariff ends
When you choose a fixed tariff, your unit rate and standing charge are fixed for the duration of the tariff. If the wholesale price changes throughout the year, you might find that you can fix again at a lower or higher price when your fixed term comes to an end, depending on which way the market moved.
What happens at the end of a fixed tariff?
We'll get in touch 45 days before your fixed term ends to give you some options.
1. You can do nothing.
You'll automatically move to Flexible Octopus, our variable tariff, when your fixed term ends. We'll show you an estimated annual cost for this tariff based on how much energy you used over the fixed term.
2. You can fix your unit rates and standing charges again.
If the wholesale price changed during your fixed period, you might find your unit rates and standing charges are a bit higher or lower than before. Either way, we'll estimate your annual cost based on what you used over the previous fixed term.
3. You can go green.
You can choose our Super Green tariff and get 100% renewable energy, with carbon offsets for gas. It's one of the best value renewable tariffs on the market, and is perfect if you'd like to do your bit for the planet.
4. You can shop around.
If you fancy a look around, we've built our own comparison site to let you see the prices of all publicly published energy tariffs in the market. Just visit Every Energy to compare prices.
Fixed vs Variable: food for thought...
At Octopus Energy, we give good value for the long-term, not just a fixed term, so our fixed and variable tariffs are very similarly priced. That means if you forget to change tariffs, you don't have to worry about your prices going through the roof.
Sadly, the same is not true of other suppliers. Some suppliers, especially the big ones, slash their fixed tariff prices to lure in new customers, then move them to an expensive variable tariff when the fixed term ends.
If you switch every year this isn't a huge problem, but if you'd rather not have that hassle it's worth checking what the variable price will be. Or, just stick with us. We'll never exploit your loyalty to win new customers.
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