The state of wholesale energy prices in 2017, and what it means for bills

This post is a follow up to What drives wholesale energy costs? which includes an introduction to how the UK energy market is structured and the type of factors that affect wholesale prices.

Wholesale energy typically makes up a little over 40% of the average household’s energy bill, so it’s good to know what affects wholesale prices, and how changes in those prices end up affecting your bills.

What happened in the energy market in 2016?

In a nutshell: In early 2016, wholesale electricity prices fell to the lowest they’d been since 2007. This enabled us, and others, to offer some astonishingly low prices early in the year. However by late October, they'd risen by about 40%, and although there’s been some volatility, they’ve stayed very high since then.

Let's take a closer look.

2016 started off by continuing the trend of past three years of steadily falling costs, with wholesale prices dropping to the lowest levels since 2007. As a lean, technology-led energy supplier in this market, this allowed us to pass on the savings to our existing customers through a series of price drops.

However, prices started rising in April, driven initially by unseasonably cold weather and growing concerns over record-low supply margins for the 2016-17 winter.

With the fall in the pound following the Brexit referendum, the cost of importing energy to the UK (something which the UK does a lot of) rose, and as summer turned into Autumn, import headaches increased further as longer than anticipated outages for a number of French nuclear reactors reduced the overall volume of energy available for importing.

In early November, as the weather grew colder, maintenance issues at the UK’s only long-term Gas storage facility, “Rough” in the North Sea, drove prices up farther still.

In January, prices have dropped off somewhat from their December peak as temperatures proved relatively mild. It remains to be seen where prices will go from here.

How will these changes to wholesale prices affect my bill?

This is actually a less-than-straightforward question to answer. And to do so, we’re going to need to take a quick dive in the energy pricing tactics that currently abound in the UK energy market.

Most UK households are on Standard Variable Tariffs. These are tariffs with no end date, where prices change (historically, around once a year) based on broad trends in wholesale energy prices, and other factors such as cost of distribution or government charges.

Then there are fixed tariffs. These are tariffs where the unit prices and standing charges are guaranteed not to change for a fixed amount of time, typically a year, although 13 months and 18 months are also popular. Once a fixed tariff ends, that customer is placed onto a standard variable tariff, until they chose to do something else.

Makes sense! How does it work in practice?

Unfortunately, most suppliers in the UK price their tariffs on a “tease and squeeze” model - where fixed term deals are used to lure in customers, before they are moved onto an overpriced variable tariff once the fixed term ends.

Oddly, in this scenario, it’s the fixed term deals that most closely follow the trends of the wholesale prices, rather than variable tariffs. This has been borne out over the last 12 months with fixed term prices rising by around 10%. The increase is less than that seen in the rise in wholesale costs as some suppliers are willing to offer loss-leading tariffs to rapidly grow customer numbers, or as teaser deals for more expensive tariffs.

Tease & Squeeze suppliers would rather not tell their variable customers anything at all - as it might wake them up to just how much they’re overpaying, and that it’s time to switch. 

Despite this, the past few months have seen several suppliers with tease and squeeze pricing raising the prices on their standard variable tariffs including Co-op, Ovo, and EDF Energy.

British Gas, SSE and E.On have announced they won’t raise their prices until March at the earliest, however it’s worth noting these are still amongst the most expensive tariffs on the market.

Octopus are one of a handful of companies who don’t believe it’s fair to charge loyal customers so much more on standard variable tariffs than new customers on fixed ones. Instead, we set the prices of both fixed and variable tariffs based on what we pay on the wholesale market.

So, back to the original question of how these changes will affect your bill:

If you’re on a variable tariff, your costs will change with the changing wholesale costs, however you can rest assured we’ll always price it fairly, without the “loyalty tax” of the Tease and Squeeze model. We’ll always give you 30 days notice in advance of a price rise, and make the process of fixing your prices as simple as possible.

We'll also cut our prices as soon as it's feasible to do so. In 2016, we dropped our variable prices for existing customers four times.

If you’re on a fixed tariff, the first you’ll notice the changes in energy price is when you come to the end of your fixed term contract - even the best fixed price deals may be more expensive than you’ve been paying.

However, the factors that drive price, such as unseasonably cold weather, can drive up your consumption. These bumps should be relatively minor, but over time may mean you need to top up your account (or withdraw some credit if it goes the other way) to ensure your account isn’t getting too far out of balance. We periodically review all our customers’ accounts, and will get in touch in good time if we think you’ll need to make an adjustment.

If so much of Octopus’ energy is purchased directly from renewable sources, why is it affected by wholesale price changes?

When we contract with renewable energy producers – regardless of whether the project is funded by the Octopus Group or not – we have to pay a fair market price for all the energy we purchase (even if that happens to be all the energy that producer generates).