What should you do in the face of high energy prices?
Right now, 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”. He's been calling on other energy companies to work together to spread the costs over time. Others are calling on the government to cut VAT on energy and take 'levies' currently paid for on your energy bill into general taxation instead. Of course, these measures would be great too. But however we do it, - we need to find ways for the UK to absorb this global energy shock without making bills unaffordable.
Read on for more info about how this crisis happened, and how we're working to keep your prices as low as possible. Or skip to what's most important for you:
- The difference between fixed and variable tariffs
- How you're protected by the Energy Price Cap
- Which should you choose?
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 300% 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.
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 quite 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”, I’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 £1,277 per year (this is for an ‘average home using an average amount’ of gas and electricity, according to the energy regulator Ofgem).
This ‘cap’ was set a while ago, and right now, the global market crisis means that it costs us around £2,000 to buy that energy for customers for the year - so in fact suppliers can lose over £700 for every customer on a variable tariff!
Ofgem will change the Price Cap amount in April this year 2022, because the global energy market price has kept increasing, we’re expecting the amount energy companies are allowed to charge customers to increase by around £700, up to £2,000 per year. At that point, there may not be any cheaper fixed tariffs available, so if you’re on a variable rate tariff you could end up paying more than if you’d chosen a fixed deal now.
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’re also running the Winter Workout challenge. Over 250,000 customers have opted in to this ground-breaking programme, and are seeing average savings of 5% on their bills. Some have even saved over 30% against their target.
Even if you’re not taking part, we’re sharing all of the tips people are benefiting from here.
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