Necessary FYI
The market could be very risky and this weblog shall be old-fashioned the second it is revealed.
Nevertheless, the evaluation stands and we’ll preserve updating it over time.
This can be a tumultuous time in vitality: a once-in-a-generation disaster pushed by fossil fuels, made even worse by Russia, the world’s largest gasoline exporter, invading Ukraine.
We’re dedicated to honest costs that actually replicate the price of the vitality we provide you.
On this weblog, we’ll give perception into what is going on on within the world wholesale vitality market, that can assist you higher perceive developments in UK tariff costs.
December 2023
Wholesale Costs stay increased than pre-crisis ranges
We cannot sugar coat it. After months of market instability, wholesale market costs for gasoline (which nonetheless largely decide electrical energy prices within the UK) stay a good bit increased than the “regular” pre-crisis charge of round 50-70p per therm. Costs on this last quarter of the yr are wanting a bit of higher, however provided that the UK’s electrical energy value cap is pegged to this wholesale charge (and based mostly on electrical energy costs 3-6 months earlier within the yr) this has meant that the typical family will count on to see a value rise on the first of January. The value rise will work out at 5% or round £100 – to £1,928 for the typical dwelling over the course of a yr.
On the floor of it, these excessive wholesale gasoline costs (and the corresponding value cap rise) have been pushed by a variety of things. Specifically, the continued Russian invasion of Ukraine and efforts to decouple from Russian gasoline have conspired with ongoing tensions within the Center East to push gasoline costs up, which is mirrored within the quantity it prices for vitality retailers to acquire vitality in your behalf.
Ostensibly, vitality value cap is up due to tensions within the center east compounding the continued decoupling from Russian gasoline and post-Covid provide chain points. However underlying is our reliance on gasoline, market construction which bases elec value on gasoline & a bloated system 1/n https://t.co/ShQy6CjMDs
— Greg Jackson (@g__j) November 23, 2023
Nonetheless, it’s essential to do not forget that under the floor, all of that is rooted in our vitality system’s reliance on soiled gasoline and a market construction that forestalls the advantages of low cost, clear renewables from rising to the floor. If we need to see decrease costs, we should push for a system the place we are able to shortly and effectively construct and join renewables to the grid. On the similar time, we should push for a market rethink. ‘Native pricing’, moderately than a single UK value, is projected to save lots of the UK £52bn over 16 years partially by decreasing inefficiencies, for instance. All of this might go an extended method to decreasing our reliance on risky, costly fossil fuels and do wonders to convey vitality costs down.
June 2023
Wholesale Costs are falling – what is going on on?
Since our final wholesale market replace in December 2022, wholesale costs continued to fall by way of to February, and have remained round 5 to 6p / kWh since then.
A lot decrease than the peaks of final yr. Nevertheless it’s nonetheless significantly increased than the extent it was at in April 2021, which was 2p/kWh. The chart under exhibits gasoline costs.
How is the wholesale gasoline value labored out?
The wholesale gasoline value measures the longer term costs over the subsequent 12 months, and takes under consideration how the demand modifications all year long.
OFGEM use this similar methodology to set the worth cap. On this replace, we’ve displayed costs in p / kWh, together with 5% VAT, to be in keeping with what our prospects see on their payments. The wholesale market desire to cite UK wholesale gasoline costs in p/therm, excluding VAT, which is why their figures would possibly look a bit of totally different.
A value of 5p / kWh together with VAT is equal to a value of 140p /therm excluding VAT.
Ofgem has set its value cap at 7.5p / kWh
You may see that the chart for wholesale gasoline costs settles at round 5p/kWh. Ofgem’s value cap takes this under consideration, in addition to extra community prices of two.5p/kWh.
Why haven’t retail costs fallen as a lot as wholesale costs?
We purchase vitality 2 – 5 months upfront to verify we’re ready for any modifications out there, as we noticed in 2021.
The decrease wholesale costs we’ve been seeing extra not too long ago shall be mirrored in our tariffs from July 2023 onwards.
Whereas wholesale costs had been peaking (30p / kWh), retail costs (the costs you get out of your vitality provider) reached a most of 10.3p / kWh. That is due to the Vitality Value Assure low cost, which diminished retail gasoline costs by 6.7p / kWh in Q1 and a couple of.3p / kWh in Q2.
Why doesn’t Octopus purchase vitality on the cheaper, ‘day forward’ value?
Shopping for our vitality upfront protects our prospects towards sustained will increase in wholesale costs. Which means if there’s a sudden improve, our prospects gained’t must pay the best costs.
‘Day forward’ costs can soar round rather a lot, based mostly on climate and different short-term components.
Whereas we do encourage prospects to shift their consumption to days and occasions when costs are cheaper, most of our prospects nonetheless find yourself utilizing extra on colder days, when the ‘day forward’ value is increased due to elevated demand.
Trying forward
Vitality markets are unpredictable, pushed by many components together with climate, geopolitics (particularly the struggle in Ukraine), coverage and politics. Nevertheless, we are able to take a look at ahead markets to see what the market is anticipating. We show these in p / kWh together with 5% VAT as that’s what is proven on buyer payments.
In the meanwhile UK gasoline short-term costs are round 2.3p / kWh, decrease than they have been for the previous couple of years. That’s as a result of final winter was hotter than regular, and gasoline storage ranges are at the moment excessive for this time of yr.
Nevertheless, you will need to do not forget that they nonetheless aren’t low in comparison with the typical value from January 2010 to December 2019, which was 1.8p / kWh.
December 2022
Wholesale Costs are falling – why am I nonetheless paying the identical charge?
1) Wholesale vitality costs are decrease than the height they hit in August, when gasoline per therm reached an unimaginable 704p. Proper now, Gasoline per therm is round 197p, however that is nonetheless excessive – in winter gasoline often solely prices round 50p a therm. This implies proper now, vitality prices are 400% the traditional stage). We’re not out of the woods but.
2) The small constructive is that no family has ever paid something near the height 704p a therm. With vitality corporations shopping for vitality forward, and authorities subsidies to households (the EBSS and EPG schemes).
3) The vitality value cap additionally GUARANTEES you’ll see decrease prices once they fall. There’ll be a lag – simply because the vitality value cap slows the worth rises, it additionally slows falls – however vitality suppliers usually are not capable of pocket extra revenue.
Latest market modifications have been drawing a good bit of consideration.
Graphs like this one on circulating on social media have prompted a number of questions: why do these sources say gasoline costs are 📉 when my costs are 📈?
£ price to purchase 1 yr gasoline and electrical energy for a median buyer in 2020 – 2021 (Observe that that is the pure gasoline price – prices for Grid, networks, meters, taxes, levies and so on add as much as £1059 extra).
What’s occurring within the wholesale markets?
Since lockdown ended and companies reopened, world vitality consumption has elevated quickly and considerably (significantly in China). In 2021, Europe’s ageing vitality infrastructure struggled with reliability. There have been outages in a lot of French nuclear mills and northern gasoline fields. This, coupled with escalating tensions between Russia and Ukraine which raised questions concerning the reliability of Russia’s gasoline provide, meant wholesale costs elevated, on the time, to report ranges.
In February 2022, fears had been realised as Russian troops invaded Ukraine. Europe has historically imported nearly half its gasoline from Russia, however shortly discovered itself putting sanctions on Russian corporations similar to Gazprom. The provision of Russian gasoline didn’t cease instantly, however was quickly diminished. Then in September there have been explosions on the essential Nord Stream pipelines that ship gasoline from Russia to Germany, which means that, even when there’s quickly an surprising geopolitical decision, provides from Russia are more likely to stay low for a while.
Extra not too long ago, some alternate options to Russian gasoline have been discovered and there have been some welcome falls in costs. Although a lot of continental Europe has historically been reliant on receiving gasoline by way of pipelines, it can be shipped as liquified pure gasoline (LNG). International locations like Germany, the Netherlands and Finland have scrambled to construct floating LNG terminals and are actually importing gasoline this manner, and after an unexpectedly heat autumn, reserves are holding regular. Clients are additionally consuming much less vitality on account of excessive costs. All these components have diminished wholesale costs, and costs have dropped, and while nonetheless extremely excessive, are round 1/3 of the height ranges seen in late summer time.
Nevertheless, we’re removed from out of the woods. Costs are nonetheless round 4 occasions increased than regular ranges. A sustained interval of chilly climate would shortly eat by way of our stockpiles. We’re extra uncovered to technical outages in key mills and producers as a result of there are merely fewer obtainable replacements than there have been in recent times.
£ price to purchase 1 yr gasoline and electrical energy for a median buyer in 2021 – 2022 (Observe that that is the pure gasoline price – prices for Grid, networks, meters, taxes, levies and so on add as much as maybe £1059 extra).
The place’s the cash going?
The vitality value cap GUARANTEES you’ll see decrease prices when gasoline costs fall. There’ll be a lag – simply because the vitality value cap slowed the worth rises (pushing them again to this October) it additionally slows falls – however you may be sure vitality suppliers usually are not capable of pocket extra revenue.
Nevertheless, there’s no cap on the costs vitality mills and producers can promote at. There can’t be – gasoline and electrical energy is bought by non-public corporations on a world market. If there was a cap positioned on wholesale gasoline and electrical energy within the UK then the vitality could be bought to different international locations as an alternative and we might threat blackouts.
Globally traded Liquid Pure Gasoline is essential for the UK and Europe to get adequate gasoline provides within the absence of flows from Russia. To verify we obtain the quantity we’d like, we have to outbid the remainder of the world. Historically Japan and China are the biggest importers of LNG so Europe has been paying extra to get the tankers to return our method.
Critically, in lots of instances the price of extracting and transporting the liquified pure gasoline isn’t any increased than earlier than. Nevertheless, the struggle and the rejection of Russian pipeline gasoline has created a state of affairs the place the gasoline is now despatched to the best bidder, no matter price.
So the place is the surplus cash going? General recipients may be positioned in 4 teams.
UK based mostly oil and gasoline extractors. They’re incomes many occasions greater than regular for a similar primary prices. A few of them are seeing windfall taxes to assist scale back vitality prices however others are in a position to make use of “funding allowances” to scale back these taxesGlobal oil and gasoline extractors – the vitality we purchase from them is many occasions dearer than regular, however they don’t seem to be topic to UK windfall taxesUK fossil gasoline mills – they’re exempt from windfall taxes so when electrical energy costs are excessive are capable of make extra profitsUK renewables mills – SOME UK renewables mills are making windfall earnings while others have mounted value contracts so usually are not. All UK renewables mills are topic to windfall taxes to assist decrease payments (besides a number of small mills).
How does this affect the worth I pay for my vitality?
Proper now nearly all of our prospects are on our Versatile Octopus tariff. The value is at the moment set on a quarterly foundation based mostly on common wholesale prices over a 3 month interval (beginning 4.5 months earlier than the present value cap got here into impact). In different phrases, the worth that prospects pay between April and June 2023 will use a median of the wholesale value between 17 November 2022 and 17 February 2023.
On prime of the vitality value cap, the federal government has additionally launched the Vitality Value Assure, which means that a median buyer can pay an quantity equal to £2,500 per yr by way of to 31 March (when it would rise £3,000 per yr).
If the Vitality Value Assure (a multi-billion authorities subsidy to all UK households) wasn’t at the moment energetic then the typical invoice proper now could be £3,549, and would rise to £4,279 in January (you’ll be able to learn extra about how this works in our devoted weblog). Nevertheless, the interval that Ofgem makes use of to calculate these costs fell over a stretch in 2022 when wholesale costs had been at their highest.
Since then costs have fallen rather a lot and if this pattern continues, this can feed into the costs prospects pay from April onwards.
A very powerful factor to grasp is that these graphs present the worth to purchase vitality that day. We purchase vitality for our prospects upfront, by way of long run contracts, which has a distinct value as a result of it components future threat. Shopping for upfront, or hedging, means we are able to safe a selected value on your vitality for a number of months, smoothing out the worth to shelter you from brief time period spikes.
This graph from Ofgem illustrates it a bit higher, displaying the extent the vitality value cap was set at for every time interval vs the precise wholesale vitality price.
Earlier this yr, wholesale spikes had been completely huge. We didn’t hike the worth ten occasions increased for you then, however that smoothing out works each methods. Which is why for now, whereas wholesale is dipping brief time period, we won’t mechanically put all our costs down.
Though gasoline costs have briefly dropped, they’ve nonetheless fallen from ranges that had been method above what we’ve been charging prospects. In different phrases, these costs must fall additional earlier than they begin feeding right into a cheaper price cap subsequent spring.
Within the meantime, the Vitality Value Assure will proceed to guard prospects, and we’ve bought our £30 million Octo help fund in place, alongside a bunch of different sources, to assist present additional help to those that want it.
August 2022: A take a look at the worth of gasoline for Winter 2022
Why are wholesale costs so essential? The wholesale market is the place suppliers purchase vitality for patrons. Our price to purchase vitality makes up round 50% of each buyer’s invoice which implies when the markets change, our tariffs want to regulate as effectively.
The value most vitality mills promote their energy for is tied to the market value, not simply the quantity it prices them to generate – which implies that even the worth of inexperienced energy is impacted by rising gasoline costs.
June 2022: “I’ve heard wholesale gasoline costs have dropped rather a lot. Why aren’t vitality tariffs coming down?”
This query’s been flying round for a number of weeks, so we wished to clarify. For a brilliant fast learn, our CEO Greg tweeted a mini-thread a short while in the past:
That’s a remarkably deceptive determine. The height was round 4x increased than the worth you’re paying – it didn’t get handed on as a result of corporations purchase upfront. Equally there are short-term dips when ships flip up as a result of the climate
— Greg Jackson (@g__j) Might 24, 2022
The gasoline value that’s dropped considerably is the day-ahead value. It’s the worth to purchase gasoline in actually brief contracts. Suppliers don’t actually purchase vitality that method, due to how risky the market is everyday. We’d like to have the ability to provide steady, mounted costs to prospects to guard them from these brief time period spikes, so we purchase our vitality in long run contracts. We’ll purchase a years’ provide upfront for a buyer so we provide it to them for a hard and fast value over the 12 months, sheltered from brief time period fluctuations out there.
Whereas everyday gasoline costs have dipped brief time period, the worth to purchase a long run contract hasn’t come down the identical method.
Why hasn’t the long run gasoline value dropped?
Long run contracts must think about future dangers. Storage is low throughout Europe, plus, Russia, one of many world’s main gasoline exporters, remains to be at struggle with Ukraine, which means low provides and shortages of gasoline are anticipated this Winter. These main dangers are nonetheless factored into the worth of long run contracts now – and sadly, all of the gasoline the UK has proper now doesn’t assist a lot as a result of we are able to’t retailer it up to make use of after we want it.
Why has the brief time period gasoline value dropped a lot?
The UK has a glut of gasoline for the time being. That is making present gasoline costs within the UK actually low cost. The difficulty is, we do not have the capability to retailer the gasoline up to make use of after we actually need it later this yr in Winter. As a substitute, we’re exporting some gasoline to Europe (although that is constrained by an absence of pipelines and the truth that a number of the gasoline we have now is liquid, and Europe do not have a number of amenities to ‘regassify’ it) and burning all additional gasoline we have now to generate energy proper now. However with out storage, our long run problem of low gasoline provide in Winter nonetheless stays.
Sky Information will get into this element rather more of their article “The surreal, but additionally actual, drawback of Britain’s gasoline glut”, and the BBC’s Extra or Much less additionally featured an incredible section explaining this round 5 minutes in.
Will Octopus Vitality offer any new mounted tariffs?
Our prices to purchase energy are nonetheless actually excessive, so tariffs nonetheless replicate that. We’re frequently reassessing our charges based mostly available on the market. No matter we do, we’ll do it in a method meaning we are able to preserve taking care of everybody by way of the disaster, preserve working brilliantly for our prospects and crew, and provide aggressive, honest tariffs. We’re proud that our tech and working mannequin imply we’re an especially lean, environment friendly enterprise, which meant we may afford swallow £150 million of upper vitality prices within the disaster to keep away from passing it onto buyer payments.
We’re nonetheless providing the most cost effective variable tariff of any main provider within the UK, £50 beneath the worth cap. And we’re as relentlessly centered on driving down prices to convey honest costs for our prospects long run as ever. Actually, prospects who took a hard and fast value with us after we began in 2016 and caught on our variable tariff ever since would’ve usually saved over £1,000 by now, vs in the event that they’d carried out the identical with a Huge 6 provider.
March 2022: With struggle escalating in Ukraine, vitality costs are 5 occasions increased than final yr.
Alongside unthinkable human tragedy, Russia’s invasion has despatched shockwaves by way of the worldwide vitality market. Once we final blogged concerning the vitality disaster six months in the past, vitality costs had been 3 times regular ranges. For the reason that battle started, costs have elevated once more: they’re now extra like 5 occasions final yr’s costs.
As I write this on Monday seventh March, gasoline costs have briefly spiked to a different all-time excessive – which means vitality prices us 10-12x extra at the moment than it could’ve a yr in the past.
Issues are extremely risky proper now, with market costs altering considerably in a single day.
Why has a Russia-Ukraine struggle made gasoline costs dearer?
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Russia is the world’s largest gasoline exporter, so main geopolitical modifications throw the longer term a significant portion of world gasoline provide into uncertainty. As issues unfold, the gasoline market is transferring in response to perceived dangers of the struggle.
Russia may find yourself constraining or turning off its gasoline, which might imply remaining gasoline would turn into a a lot rarer, pricier commodity. Different international locations may additionally determine to cease shopping for gasoline from Russia, which might additionally push costs increased as they’d all must supply gasoline elsewhere – placing a massively increased demand on a a lot smaller provide.
Europe can also be shopping for up a great deal of gasoline proper now to make sure it’s effectively stocked for subsequent Winter to scale back future reliance on Russia. Lastly, Nord Stream 2, a brand new pipeline from Russia that might’ve elevated provide considerably, now appears more likely to be cancelled.
Why does that make such a distinction to UK gasoline costs?
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The UK usually solely will get round 3% of its gasoline from Russia. Nearly all of the UK’s gasoline imports come from the North Sea, and a bit from a number of totally different locations like USA and Qatar. However gasoline is bought on a world market, so it at all times has a ‘going charge’, regardless of the place it’s purchased. Round 40% of Europe’s gasoline is Russian, so the going charge for gasoline is far increased now for all the explanations within the reply above.
Does Octopus Vitality purchase any gasoline from Russia?
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We do not purchase from any Russian corporations: actually, we purchase all our gasoline from British corporations. Vitality suppliers purchase gasoline when it is already entered the UK, so it would’ve been sourced from a mixture of locations and we do not have management over the particular origins. However typically, round 3% of the UK’s gasoline comes from Russia, so if there’s any in our combine it is a tiny fraction.
What does this imply for Octopus Vitality’s costs?
We’ve been capable of purchase energy for our variable tariff prospects already, earlier than the worst impacts of the Russia-Ukraine battle, and we’ll swallow one other £50 million price of upper vitality prices over the subsequent 6 months to ensure the most cost effective variable tariff from a significant provider at £1921.
For almost all of households, a Value Cap protected tariff will provide a lot decrease charges for the subsequent few months. Anybody who actually wants to change to us now can at all times achieve this, however we’re asking that you just give us a hoop to speak it by way of first to verify we are able to actually give you higher worth.
And naturally, for those who’ve already mounted your costs, your charges and prices will not be affected till your contract ends.
Everyday, vitality costs are actually risky, and we’re having to alter our tariff choices rather more typically than regular. In the event you’re renewing your contract and get a quote for a brand new mounted tariff someday, it won’t be obtainable the day after.
Our vitality buying and selling crew have their eyes glued to the market, searching for prudent alternatives to safe energy as cheaply as doable to maintain your payments decrease.
Our value promise to you
We’re dedicated to honest tariffs, the place your costs replicate the price of vitality, with a small margin on prime for us to cowl our enterprise prices. When there’s sustained modifications within the wholesale price of vitality, we do have to regulate accordingly, however we have constantly reduce into our margins so we are able to improve costs as little, and as late as we presumably can.
In the course of the vitality disaster, we have have chosen to spend £100 million to date to maintain your payments as little as doable. We have spent an additional £50 million to supply prospects the most cost effective variable tariff of any main provider, £48 under the Value Cap. In the event you’re a buyer and you would like to seek out out extra, examine Versatile Octopus and get in contact with us.
Alongside that, we have now offered a 4% low cost on standing prices for sure tariffs, in addition to providing 100,000 prospects in want the power to use for a 6-months lengthy standing cost vacation. And after we can, we’ll convey costs down. We move financial savings onto prospects at any time when doable – firstly of 2020, when wholesale prices dropped, we had been the primary provider to chop costs. We’ll proceed to observe what’s occurring in wholesale and produce you the very fairest costs we are able to, without end.
Are you struggling to pay your payments?
We’re doubling our Octopus Help fund from £15m to £30m this winter to assist extra households. In the event you’re an Octopus buyer struggling to pay your payments, please tell us by way of our Monetary Help instrument – we’ll assist wherever we are able to.
The background to the vitality disaster: first revealed September 2021
In February 2021, Ofgem introduced a rise to their vitality value cap to regulate for wholesale costs rising. At that time, costs had been 33% increased than they had been 6 months earlier than. Since then, costs have stored rising dramatically, pushed by a variety of things:
Our world dependence on costly, polluting gasoline. Regardless of an ever rising share of the UK’s energy coming from renewables, we’re nonetheless far too reliant on gasoline (most of it imported) to warmth our houses and generate electrical energy, particularly after we want energy at brief discover – 39% of Nice Britain’s energy nonetheless comes from burning gasoline. With that in thoughts, an imperfect storm has gathered, pushing World gasoline costs to a 13 yr excessive. Sturdy post-Covid industrial demand throughout China has raised costs in Asia, so Liquified Pure Gasoline (LNG) cargoes are at the moment selecting Asian gasoline hubs over European ones, elevating costs right here.What’s extra, droughts in China and Brazil have additionally led to decrease hydropower technology, which means there’s extra competitors for gasoline, elevating additional. In a darkish irony, the very actual results of local weather change is driving worldwide demand for fossil fuels, and we’re actually feeling the fee.Provide from Russia is considerably decrease than regular as effectively, leaving gasoline storage throughout Europe solely 55-60% full – 33% decrease than the 5 yr common at the moment of yr. Now, in March 2022 it is subsequent to emptyThis, mixed with important gasoline and nuclear outages within the UK, and too few UK wind generators to generate energy from low wind ranges have led to extra gasoline, and even coal, getting used for energy manufacturing – pushing already rising wholesale gasoline and electrical energy prices to report ranges.
That is but another excuse why we’re pushing so laborious for a renewable revolution. As we generate extra electrical energy from renewable sources just like the wind and the solar (and transfer to affect heating) the UK will turn into much less uncovered to modifications in gasoline costs. In the meanwhile, nonetheless, when gasoline is pricey, vitality shall be too.