The state of wholesale energy costs in 2020

We're adjusting the price of our Flexible Octopus tariff. This means most customers – 78% of those on dual fuel – will see their annual costs fall, although some will find their costs increase.

These changes will cost us somewhere in the order of £10m in profit compared to leaving our prices as they were.

We're committed to fair prices, that truly reflect the cost of the energy we supply you. In this blog post, we'll take you through some of the ups and downs of the wholesale energy market in 2020. It's fair to say 2020 has been a year like no other.

If you're interested in how we price our energy, you may also enjoy What Makes Octopus so Very Green? or Should I Go For a Fixed or Flexible Tariff?

Wholesale energy costs in 2020

We started 2020 with falling wholesale prices in general, helped along by a milder winter than expected. On the back of this fall, Octopus Energy was the first energy supplier to drop their prices in 2020.

As the UK went into lockdown in March, energy use in the UK shifted dramatically. An increase in domestic electricity use was more than offset by the drop in demand from industrial and commercial use, leading to an overall drop in electricity demand of around 20%.

Alongside this, after an initial fall, the price of European carbon allowances (EUA's) rose sharply, as national lockdowns spread across Europe. There are some industries that are legally required to buy carbon offsets to offset their emissions, and electricity generation is one of those industries. What this means in practice is that when the price of carbon increases the cost of producing electricity using fossil fuels increases.

In the UK about 50% of our generation comes from gas, so when carbon goes up the price of power goes up. It simultaneously reduces demand (and price) for gas.

And while this was going on, there was an oversupply of gas from both the USA and Russia.

So both electricity and gas wholesale costs fell to April, but then started to drift apart.

Since May, electricity prices have been rising. It was at this time that National Grid asked EDF to turn down output from their Sizewell nuclear plant, to help balance the grid due to the overall lower demand for electricity. This was exacerbated in June, when EDF also shut down a Lancashire nuclear plant due to a defect, and 3 further plants at Heysham and Hartlepool of similar design.

In July and August gas shipments from USA and Russia were reduced dramatically, which has seen recent gas prices rising, and contributed to a faster rise for electricity.

Now, at the end of September, wholesale prices for electricity are higher than our last price adjustment, while gas is lower.

In light of this, we're adjusting the prices of Flexible Octopus, our variable rate tariff, so that the reduced gas prices come into affect before winter.