What should you do in the face of high energy prices?

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The UK energy market is in crisis.

You may have seen our CEO and Founder Greg Jackson quoted in headlines like this from the BBC: “We don’t know how high bills will go” or The Guardian: “Energy boss says UK must find £20bn to ease soaring household bills”.

We've been fighting hard to help customers struggling with high bills in the energy crisis...

We're working with the government and across the energy industry, pushing for policies to spread the higher energy costs over time and give extra support to those who need it most. At the same time, we're looking after our own customers:

  • We're not making a profit right now. In fact, we never have. In normal times, we typically charge customers a slim 5% margin on top of wholesale energy to cover our business costs and reinvest in growth. In the crisis, we're not even doing that: we've instead absorbed £100 million of the high energy costs last year to keep it off peoples' bills. And we'll absorb another £50 million over the next 6 months, meaning...
  • We're offering loyal customers the cheapest variable tariff of any major supplier: £50 under the price cap.
  • We've got extra help for those who need it most, including a £5 million Octopus Assistance fund, giving direct support to those hit worst by rising bills.

Energy prices are higher than they’ve ever been right now because the cost to suppliers like us of buying gas and electricity in the global markets has increased by 500% since this time last year.

These wholesale energy prices are so high thanks to a cocktail of extraordinary global factors, from unusual Covid-related trends in the supply and demand of gas around the world, to our dependence on gas imported from Russia. Then there’s unseasonable weather patterns driven by climate change. It’s an exceptionally difficult time in the energy industry.

A line graph showing wholesale cost increasing dramatically, from around £500 per unit in April 2021 to a high of £2600 in December 2021, to around £1500 in January 2022

Why can’t energy suppliers charge less?

More than 90% of the costs of your energy bill are out of the control of your energy supplier.

The vast majority of that 90% is defined by the price of the wholesale energy we have to buy from the global market, but that 90% also includes taxes, VAT, and payments to companies who maintain the UK’s energy distribution system (the pipes and wires that transport gas and electricity).

One question we get a lot: why would a supplier who sells 100% green tariffs be impacted by high fossil fuels prices?

Green electricity now costs less to generate than fossil fuel power. So shouldn't that mean green power costs less to buy on the market?

Because of the (very flawed) way the market is currently set up, sadly not, though as the grid gets greener, this should change.

The price power sells for is dictated by the going rate for all different types of energy. At the moment, all energy sources in the UK, from wind to solar to fossil fuels, are being sold based on the high price of gas imports – the higher price of 'brown' electrons artificially putting up the price of 'green' ones as well.

🏠 It’s like selling a house; the price is set by what neighbouring homes are sold for, not the actual cost of building the house.

What are Octopus doing for me?

We’ve repeatedly cut into the very small amount we charge to cover all of our costs to keep prices as low as possible through the crisis.

In ‘normal’ times, we aim to add about 5% to the cost of the energy we supply you to cover all our own costs of doing business (everything from paying staff, running offices etc). But we aren’t even doing that right now. Last year for example, we spent about £5 million a month cutting into that 5% to keep prices low.

Over the course of this crisis, we’ve spent over £100 million pounds from our funds to keep prices as low as possible for customers.

We cannot influence the prices to be any lower - and many companies who have priced unsustainably and unrealistically (well under their costs) have gone out of business – 28 in total went bust in 2021 including Bulb, People’s Energy and Avro Energy, displacing nearly 6 million customers. We will not do that.

What should you do if it's time for you to choose a new tariff?

If you’re coming to the end of a fixed term tariff, we will email you with the best new price we can offer right now. I will be honest, this is likely to be significantly higher than what you are paying now – and compared to previous years, where you could shop around different suppliers, there simply aren’t any cheaper deals available.

Many customers are asking: what should we do?

We have two types of tariff available – a fixed tariff, where the rate you pay per kWh of gas or electricity is fixed for the year, or a variable tariff (we call it Flexible Octopus) where the price you pay can change. However, the maximum you’ll ever pay on a variable tariff is capped to a fair level by the government’s Energy Price Cap.

How are fixed and variable tariffs different?

Because energy is sort of “invisible”, we'll use a more tangible example: good old baked beans 🥫

Let’s say you want a consistent monthly delivery of baked beans, so you’re looking into long term subscriptions.

A fixed subscription would be us saying, “OK, right now it costs us 50p to supply you a can of beans, so we’ll buy a years’ worth of beans for you right now and sell them to you over the course of a year, always for 50p per can.” Although the market cost of beans might go up or down over the course of the year, you’ve agreed to always only pay a fixed price for every can of beans.

Alternatively, you could choose a variable subscription, where we sell you beans at the market rate when we buy them. You might start off paying less than a fixed price, let’s say 45p per can. However, we won’t buy all your year's beans in advance. We’ll buy beans every few months, and while they’re 45p right now there’s no guarantee they’ll cost that much in 6 months. Anything could happen in the meantime. Bad crop yields, natural disasters, tax changes… We might end up buying beans at 65p per can, or even more. Covering our increased costs means you’ll also be paying more for your beans. This is the inherent risk of a variable tariff: you can never be 100% certain what will happen in the future.

Fortunately, because access to energy is such an integral part of our lives, there are protections in place to prevent the price of energy - beans - going too high: the ‘energy price cap’ governed by Ofgem, who are the energy regulator mandated by the government to look after energy customers.

How does the Price Cap protect customers?

Every 6 months, the government sets a maximum price that suppliers can sell energy for on their standard variable tariff – this is the Energy Price Cap.

At the moment, the price cap means that suppliers cannot charge customers on their standard variable tariff more than £1,971 per year (this is for an ‘average home using an average amount’ of gas and electricity, according to the energy regulator Ofgem). This cap level will be in place for the next six months, and a new level will be announced in August 2022 (to take effect from October).

Read our FAQs about the Price Cap, covering who it impacts, what it specifically means for your prices and more.

So what should you choose now?

At the end of the day, it has to be your choice. I personally like a fixed price, because then I know exactly what my budget is, and I won’t have any surprises - energy is so volatile right now that it seems impossible it could go any higher but we are in unprecedented times.

But different people will have different priorities – it’s like when you buy a mobile phone and you have to decide whether to pay a bit more on a monthly contract, or take a slightly cheaper fixed contract and be locked for a year. You decide based on what’s more important to you – surety or (possibly) a change price.

There's a team of people here who want to help.

Please, please get in contact with us if you’re struggling with your bills. There are many ways we can help.

We set up the Octo Assist Fund in November 2021 as part of our campaign to help those worried about paying for their energy during this Winter. If you're an Octopus customer, you can access our Financial Support form here – a quick and simple online tool which asks you a series of questions about your financial situation. We can offer a number of support options based on circumstances and need, including access to existing schemes, monetary support from the fund, or a loan of a thermal imagery camera to find heat leaks at home.

To help all of our customers use gas more efficiently at home, we’ve also also run the Winter Workout challenge over the past 12 weeks. Over 250,000 customers opted in to this ground-breaking programme, and those who saved gas cut their bills by an average of 12%. Collectively our customers saved nearly £4,000,000 in bills, and 14.3 million tonnes of CO2.

You can try out the simple tips that helped people cut gas bills and stay cosy here.

Commonly asked questions about the energy crisis

Why have my prices gone up more than 54%?

You might have seen reference to the 54% figure. It's important to understand: this isn't a flat % increase on unit and standing charges, as that's not how the price cap works. The 54% figure is the average amount the price cap has increased since it was last set six months ago by Ofgem.

Put really simply: the price cap sets the rates that you pay, not the total amount you pay.

The price cap is actually a set of calculations which Ofgem creates based on what they see as a reasonable cost for an energy suppliers to charge customers on their variable tariff. This takes into account a bunch of different factors, including wholesale costs, infrastructure costs, and operational costs.

The really important bit: Ofgem derives the price cap figure from what they see as an "average" UK home on a variable tariff. Not everyone's home is the same: some are smaller, some are bigger; some live alone, some have big families. Each of these homes will use a different amount of energy.

So while the average home will see an increase of 54%, a home that uses less energy will see a smaller increase, and vice versa. If you were on a fixed tariff before and it's coming to an end soon, you could be seeing a higher increase than 54%. That's because wholesale energy costs around five times more now than it would've when you fixed your prices a year ago.

Fixed tariffs aren't protected by the price cap: instead, they're based on our real cost to buy a year's power for you – as that cost has gone up a lot, fixed prices are higher too. Customers are welcome to go on our Flexible Octopus tariff any time if they'd prefer that over a fixed price.

What if I keep getting into debt?

Please, please get in contact with us if you’re struggling with your bills. There are many ways we can help.

We have loads of helpful information online about what to do if you're struggling to pay.

If you fall into debt for any reason, we can assist by:

  • Providing some breathing space — maybe in the form of a short term deferment of payment
  • Working directly with our team on a repayment plan that suits you
  • Adjusting your payment methods to find one that works best for you
  • Pointing you in the direction of experts who can help advise on your debt

If you're an Octopus customer, you can also access our Financial Support form here – a quick and simple online tool which asks you a series of questions about your financial situation. We can offer a number of support options based on circumstances and need, including access to existing schemes, monetary support from the fund, or a loan of a thermal imagery camera to find heat leaks at home.

Why is the price of green electricity being driven higher by a gas crisis?

The UK's outdated wholesale market has a single price for electricity every half hour (which energy suppliers need to pay) and it's usually determined by the cost of gas. Renewables will make electricity a bit cheaper this year – in fact, turbines are generating so much cheaper than the current wholesale price that they're due to pay suppliers back for the extra they've earned. £39 million up til now, but it could be lots more in the year ahead.

But we need much more renewable generation in the system, and the market should be reformed. Greg talks about it more here:

Are energy suppliers like us making a massive profit right now?

No – we haven't made a profit since we've been in business, and we won't this year either. We usually reinvest any small margin we make to expand our business: either by bringing green power to more countries, or driving system change by investing in low-carbon technologies and research, or energy generation.
But throughout the crisis, we've instead put that money into helping customers even more.

Like using £150 million from our own reserves to keep bills lower by swallowing more of the high cost of power. (That's evident in our new Flexible Octopus tariff, which is £50 below the price cap for existing customers – the cheapest of any major supplier).

We've also invested in schemes like the Winter Workout, which led 250,000 customers to collectively save over £4 million in gas bills through simple tips.

And most importantly, we've focused direct support where it's most needed, with a £5 million dedicated fund to give bill relief to customers who are struggling the most to pay.

Why aren't we profiting from the high cost of energy? Because we're not an energy producer. (Well, not a major one anyway, yet: we do have two turbines with enough power for 800 homes). We buy energy wholesale, or where we can, buy it directly from UK producers: in both cases, any profit goes to those producers. Not us.

We have a renewables investment business, but we still don't own generators like wind farms directly. Thousands of investors do, so as a business we don't get this profit either.

Why are standing charges increasing, not just unit rates?

Energy markets are highly regulated, so as an energy supplier we get charged certain costs for every single customer we have; even if they don't use any energy. These costs are passed on to customers via standing charges.

Costs have increased to cover expanding environmental and social schemes like Warm Home Discount - which will be available to more people this year, so costing more overall - and the ECO scheme. Plus, other things, like the administrative cost of taking over the customers of suppliers who've gone out of business, and some distribution costs moving from unit price to standing charge.

Recent regulatory changes - Ofgem's Targeted Charging Review - have increased those costs even more: which we opposed.

Our CEO Greg explains more here:

The electricity standing charge increase is driven by two changes to how much it costs us to supply your electricity. The first is the cost of failed suppliers (sadly its more than usual this year because half the retail market went bust in 2021). The industry has changed how customers are charged for using the distribution network – the cables that deliver electricity to your home. The costs of these networks have been moved from the unit charge to the standing charge.

Some of the increase in electricity standing charge is also due to the increase in the rollout of the Warm Home Discount which is set to be available to more people this year.

Gas standing charges have increased slightly, but not as much as electricity. This is because although the cost to cover failed suppliers is split nearly equally between the fuels, for gas this cost is added to the unit charge rather than the standing charge. The increase in gas standing charge is primarily due to extra Warm Home Discount costs.

Ofgem have broken down the up to date split of costs that make up a typical standing charge here.

Why do standing charges vary based on where you live? It costs different amounts to get power to homes in different parts of the country. Each of the electricity distribution networks (DNOs) face different costs to maintain, upgrade and operate their networks. These costs are shared among their own customers, i.e people who live in the region where they operate.

How does the government's £400 Cost of Living energy support work?

  • Every UK household will receive £400 in October 2022 to help offset their higher bills in the energy crisis. No one needs to pay that money back.
  • We don't have any more specific information about this £400 grant yet, like how it'll be paid or whether people can opt out of it. We'll update here as soon as we know.
  • There's also additional support for those hit worst by the high cost of living – low income households, pensioners and those with disabilities. You can read more in the government's Cost of Living Support Fact Sheet.
  • The cost of this support is being partly covered by a windfall tax on oil and gas company profits – you can read more about how that works in the Energy Profits Levy Fact Sheet.

Why has the support changed from £200 to £400?

On 3rd February 2022, the Government announced a £200 energy bill rebate would be added to every UK energy account in October, and would then be paid back from everyone's bills gradually over the next five years.

On 26th May 2022, the government changed that plan, announcing that the £200 would no longer need to be paid back, and doubled it to £400. That's how we've got to the universal £400 energy grant in the Cost of Living Support package.

Read more from the Octo-verse

A photo of an Octopus team member on the phone to a customer
About the Energy Price Cap 2022 FAQs following the announcement of the new cap, Feb 2022
A photo of the Octopus Winter Workout
Simple ways to save on gas bills ...and stay cosy
A photo of renewable generation
The state of wholesale energy The energy market, explained

Published on 6th January 2022 by:

image of Rebecca Dibb-Simkin

Rebecca Dibb-Simkin

Director of Product and Marketing

Hey I'm Constantine, welcome to Octopus Energy!