22nd March 2019

Should I go for a fixed or flexible tariff?

David Sykes, Head of Data Science

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We’re often asked whether you should go for an Octopus Fixed or Flexible Octopus tariff and how we set the price for each.

We've knocked together a little video to explain this:

The main consideration will be how much certainty you want, and for how long.

Let’s start with an explanation of how the market works.

How we buy our energy

Octopus Energy buys its energy either from the wholesale market (alongside Ofgem-accredited renewable energy certificates, of course) or directly from renewable energy generators like solar farms.

As with any commodity, the price will vary. The electricity cost-per-unit (kWh) moves minute-by-minute since traders are constantly buying and selling forward contracts. This can be quite complex.

Think about it like trying to predict what the price of, say, peanuts will be in years to come.

Things can happen to affect that price. For instance, the US is the world’s biggest producer of peanuts, but virtually all the crops are in the southern states, which are prone to be hit by hurricanes and even tornadoes.

So what happens when we offer you a price that is fixed for 12 months?

The important bit to remember is that when we buy energy on your behalf, we fix it for an agreed time (usually 12 months), so that cost per unit is locked in for that whole period.

In a nutshell:

  • The fixed rates we offer largely depend on wholesale costs at the time that you fix
  • We buy your energy upfront based on this cost per unit
  • Your costs per unit for your energy won’t change for 12 months because we bought that energy upfront
  • Once we’ve bought it at the price, we’ve bought it; we can’t sell it back

So you know exactly what cost per unit we will charge you for your consumption. Your energy bills will still vary, though, according to your usage that month. To go back to the peanuts analogy, we might buy your peanuts at a retail cost of £1 per kg, but your monthly bill will depend on how many peanuts you eat that month. If you eat 1kg, it’ll be a quid, but if you only eat 500g, it’ll be 50p.

You’ll have certainty and are protected against wholesale prices going up in a relatively volatile trading market.

What about when my fixed deal ends?

At the end of your term, we’ll offer you a new price for your Octopus Fixed tariff based on wholesale costs at that time. If you don’t fix, don’t worry — you’ll roll onto our Flexible Octopus tariff. And you can switch tariffs at any time without any exit fees.

And what determines our flexible prices?

With our Flexible Octopus tariff (what some suppliers call standard variable), we follow the movements of the wholesale market as closely as we can. Those movements can be a little like charting the path of a rollercoaster but in essence we smooth out the highs and lows as much as we can.

In a nutshell:

  • We buy your energy throughout the year
  • Our wholesale costs change across the year
  • From time to time your rate may change as our wholesale costs vary

So you know that the cost per unit for your energy consumption will more closely follow the market price.

With a flexible tariff there will be more pricing variability against our fixed tariff where we've fixed the cost and bought your energy upfront — though it means that the cost per unit can be slightly volatile, and will go up as well as down.

To sum up:

Whether you choose Octopus Fixed or Flexible Octopus, our tariffs are always good value. At time of writing, the difference between our fixed and flexible tariffs is typically around just 5%. Some choose fixed since they prefer to be certain that the price we quote is the price they’ll pay per unit for the next 12 months.

We can’t always guarantee to be the cheapest, though we are always there or thereabouts. But we can guarantee always to be fair, open and great value for money. We’re proud of what we’re doing, and we’re proud that we have led the campaign to shake up and disrupt how energy providers set their prices, making it fairer and more transparent

That’s because we believe energy should be more affordable for all, not just because some providers will try to tempt you in with a cheaper introductory offer, which only costs you far more in the long-term.

Read more about our pricing and tariffs here.

image of David Sykes

David Sykes

Head of Data Science

Hey I'm Constantine, welcome to Octopus Energy!

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