Octopus Price Promise calculations explained
We started Octopus Energy to make energy prices truly fair and transparent. Our tariffs are based on the wholesale cost of energy, i.e., what we pay for it. But wholesale costs have risen steeply recently — they’re more than five times higher than they were at the start of 2021.
While suppliers’ costs (and so energy prices) are going up across the board, we launched a tariff so customers always know they’re getting a fair deal.
Octopus Price Promise is a two year tariff (ending September 2023).
During that two years, we guarantee your energy prices are always below Ofgem's Energy Price Cap – at least £50 cheaper a year for a typical home with both electricity and gas.
(Ofgem is the government department who regulate energy companies, and a typical home is a formal term defined by Ofgem as a medium-consumption home which energy companies use to explain pricing.)
On Octopus Promise, we will change your unit price and standing charge when the Government sets a new price cap level - this happens twice per year in April and October. Once we know the price the cap is set at, we’ll automatically recalculate your tariff rates to ensure they’re always at least £50 cheaper. There are no exit fees so you are not locked-in in any way if you want to change tariff, or even supplier.
What is the Energy Price Cap?
Ofgem's Energy Price Cap puts a ceiling on the price of energy suppliers’ variable ‘default’ tariffs. It’s been an important safeguard over the past few years, making sure customers don’t get unknowingly ripped off on their power. The level the cap is set at is reviewed every April and October to ensure it’s a good reflection of a suppliers’ current costs of operating and buying energy, so no companies are charging far more than they need to and making a massive profit.
We want our customers to see exactly how we work out Octopus Promise prices, so our boffin Helena’s here to explain the formula.
Step 1: Calculating tariff rates based on the price cap
Ofgem publishes two annual quotes in April and October, which set out guidance for the maximum price suppliers can set their standard tariffs.
The UK is split into 14 ‘supply regions’, and the cap is different in each region based on how much it costs to transport energy to each (and a few other factors). There’s a different capped amount for both electricity and gas for every supply region.
The way the cap works, there is a maximum level set for two different things:
- Daily ‘standing charge’ (SC) – i.e. the maximum amount a user who consumes 0 kWh of energy should pay per year. We’ll call this Z.
- Overall energy cost – i.e the maximum amount a household that consumes a “medium” amount of energy should pay per year (including the Z amount), used by suppliers to calculate the unit rate (UR) of your tariff (in other words, how much you pay per unit of energy). That’ll be M for U kWh.
Ofgem also determine what they mean by a typical medium-consumption household: it currently stands at 2,900 kWh of electricity and 12,000 kWh of gas. (That’ll be U).
Therefore, the maximum rates for a tariff to be compliant with the price cap are:
PC_SC (pence per day) = Z / 365
PC_UR (pence per kWh) = (M - Z) / U
Step 2: Calculating your Price Promise savings
To guarantee fair pricing, we want to offer our customers a guaranteed saving against this maximum amount, which we will simply apply as a percentage (P%) reduction to all tariff rates to ensure all customers benefit equitably.
We calculate P like this:
P = S / Q x 100
- S is the annual saving for a medium dual fuel user, which we have chosen to be £50 inc VAT
- Q is the total maximum quote of a medium dual fuel user (M_elec + M_gas) averaged over the regions.
If we put all this together, you’ll see that the rates of your Octopus Price Promise tariff can be worked out by this neat formula:
SC = (1 - P / 100) x PC_SC = (1 - P / 100) x Z / 365
UR = (1 - P / 100) x PC_UR = (1 - P / 100) x (M - Z) / U
As Ofgem updates the price cap to reflect the changing costs of supplying energy (i.e. Q), This Percentage reduction (P%) will change in future price cap periods, but we can promise that we’re committing to Savings (S) of £50 for the Octopus Price Promise Tariff.
What about households on Economy 7 tariffs?
For a two-rate tariff, the maximum limit is applied to the weighted average of the day rate and the night rate, which results in many pairs of values that would be compliant with the price cap:
(UR_day x 0.58) + (UR_night x 0.42) < PC_UR
Typically for Octopus tariffs, the day rate is about 1.6x the night rate, to reflect higher costs during peak times.
A note on payment methods
Ofgem sets a different price cap level for Prepayment, Standard Credit (aka POROB), and Other (i.e. Direct Debit). The Octopus Price Promise product is intended as a product for customers who pay by Direct Debit, and therefore calculated against the level for Other Payment Method.
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