28th October 2019
How will Brexit affect my Energy Bills?
Matt Bunney, Head of Fuel Procurement
It's time for something really special. That’s right, your energy supplier’s blog is delving into everyone’s favourite topic: Brexit! Please send all your 'thank-you' emails to email@example.com.
Jokes aside, some people have been wondering what the UK’s departure from the EU could mean for energy prices. We don’t have all the answers while everything is still up in the air. With today’s news that the deadline has had an, erm, “flextention” (🤢) for another three months, Brexit chat isn’t going anywhere, any time soon. We reckon it’s worth letting you know what we do know already.
Here’s how Brexit could impact your energy bills over the long term.
Your energy prices can be broken down into four main sections – wholesale costs, network costs, environmental obligations and ‘other costs’.
Let’s take a look at how each of these costs could be affected by Brexit:
|Percentage of bill||Likelihood of Brexit impact|
|Wholesale||36%||Hard to say at this stage|
|Environmental and Social Obligations||23%||Unlikely|
|Other Costs (inc. VAT, systems, staff, bad debt)||15%||Unlikely|
How Brexit could affect wholesale energy prices
Wholesale electricity costs change quite a lot from one moment to the next (every half an hour of the day in fact), according to a bunch of factors like weather, customer demand, global energy production, and currency fluctuation. For example, when energy is most in demand, around dinner time, prices are much higher than they are at 3am.
Octopus buys your gas and electricity from the wholesale market in advance to reduce the impact of highly variable prices on customers. This is why we can commit to set prices for customers on fixed tariffs, and keep prices stable for customers on flexible tariffs.
Over the next year or two as customers reach the end of their fixed contracts and it comes time for us to buy their energy for the year ahead, movements in wholesale costs (either up or down) will factor into the new prices we can offer.
The UK imports around 55% of its energy from Europe and the rest of the world. This is where Brexit could have an impact – through currency fluctuation.
If the pound drops in value by 10%, the UK will have to pay 10% more for the energy it imports. It’s hard to know exactly how exchange rates could be affected by Brexit – dependent on how, when, and if it happens. But there’s a lot to suggest the impact wouldn’t be too bad. Currency markets are naturally risk averse. To some degree, the risk of Brexit happening has already been priced into current exchange rates.
We only buy UK green energy. So how come the cost of imported energy makes a difference to our energy purchasing costs?
Wholesale power is traded as a single, homogenous product, regardless of how it’s generated. What does that mean? Aside from how much pollution they pump into our atmosphere, the electrons coming down the wires have essentially the same physical characteristics and quality no matter if they’re generated in the UK or overseas, and from a green, low-carbon source or a fossil fuel source. That means the prices of all different energy generation types are tied permanently. If the price of imported, fossil fuel generated power goes up, the price of all power, including UK renewables, goes up too.
Other factors that could impact on wholesale prices...
The Emissions Trading Scheme
As an EU member state, the UK is also part of the EU Emissions Trading System (ETS). ETS is a form of carbon pricing in which a limit to the total EU emissions is set each year and divided into 'allowances', each equal to one tonne of CO2. European electricity generators who emit CO2 must purchase these allowances, in proportion to their emissions (commonly known as Carbon Credits), or face a hefty penalty.
If the UK Hard Brexits, we’ll no longer belong to the EU ETS. The UK will have to adopt our own emission trading scheme. It is uncertain what impact this will have on wholesale power prices, but we will continue to monitor these developments closely.
The UK imports power from continental Europe through wires called 'interconnectors' that get to us via France. The safe operation of these wires and trade of energy through them is protected by EU legislation. All countries bound by these laws are part of an Internal Energy Market. If we leave the EU without a deal, we’ll be “decoupled” from this group. There's a chance there could even be disruption to energy being imported into the UK, which could lead to an energy price increase and more volatility in the wholesale market.
It's in the EU's interest, and the UK's interest, to keep the 'interconnectors' running as they always have. The good news is that our Government has pledged to keep operating them with the existing EU regulations to reduce the chance of disruption. If we Hard Brexit, there'll eventually be tariffs on all imported energy. The UK has volunteered to suspend any tariffs on power imports for 12 months
What else makes up my energy costs, and why won’t it be affected by Brexit?
The wires that carry our electricity and the pipes that deliver our gas are owned by British companies.
The cost of maintaining and upgrading these networks is managed by Ofgem, on behalf of the UK government, and so is unlikely to be impacted by Brexit.
Environmental and Social Obligations
These costs go towards supporting the development of UK renewables, domestic energy efficiency initiatives and assistance for vulnerable customers.
A number of these schemes are aligned with international targets and it is possible that the UK government could withdraw their support after Brexit. So far, the government hasn’t proposed any new changes to these schemes, and so, the likelihood of Brexit-based impacts is low.
As part of our tech-led approach, we manage our business through our own proprietary tech. This means we can be more operationally efficient than any other UK energy suppliers, and offer low price tariffs. It also means we’re not so reliant on third parties who might have to increase costs after Brexit.
So what does this all mean for me? If the UK leaves the EU on 1 February, will my bills increase?
If you’re on a fixed price tariff, your rates are locked in till the end of your contract. You can always fix your prices again now, as we have no penalties for switching tariffs or leaving your contract early. Just over a month from the end of your contract, we’ll be in touch with all our new prices, so you can choose to fix your tariff again.
If you’re on our flexible tariff, your prices will be based on the wholesale price of energy and the other costs we went into earlier. They may be affected by Brexit (although you’ll always have at least a month’s notice of any upward change) — but as yet, we just don’t know. Don’t forget, you can fix your prices for 12 months any time. Just log on to your account and choose a fixed tariff if you want that certainty.
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