What's occurring with international vitality costs?

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 fuel exporter, invading Ukraine.

We’re dedicated to truthful costs that really mirror the price of the vitality we provide you.

On this weblog, we’ll give perception into what is going on on within the international wholesale vitality market, that will help you higher perceive traits in UK tariff costs.

We can’t sugar coat it. After months of market instability, wholesale market costs for fuel (which nonetheless largely decide electrical energy prices within the UK) stay a good bit larger than the “regular” pre-crisis fee of round 50-70p per therm. Costs on this ultimate quarter of the yr are trying a bit of higher, however on condition that the UK’s electrical energy value cap is pegged to this wholesale fee (and primarily based on electrical energy costs 3-6 months earlier within the yr) this has meant that the common family will anticipate to see a value rise on the first of January. The worth rise will work out at 5% or round £100 – to £1,928 for the common house over the course of a yr.

Nonetheless, it’s necessary to do not forget that beneath the floor, all of that is rooted in our vitality system’s reliance on soiled fuel and a market construction that stops 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 will shortly and effectively construct and join renewables to the grid. On the identical time, we should push for a market rethink. ‘Native pricing’, slightly than a single UK value, is projected to avoid wasting the UK £52bn over 16 years partly by decreasing inefficiencies, for instance. All of this might go an extended solution to decreasing our reliance on unstable, costly fossil fuels and do wonders to carry vitality costs down.

Wholesale Costs are falling – what is going on on?

Since our final wholesale market replace in December 2022, wholesale costs continued to fall by to February, and have remained round 5 to 6p / kWh since then.

A lot decrease than the peaks of final yr. However it’s nonetheless significantly larger than the extent it was at in April 2021, which was 2p/kWh. The chart beneath reveals fuel costs.

How is the wholesale fuel value labored out?

The wholesale fuel value measures the longer term costs over the subsequent 12 months, and takes into consideration how the demand modifications all year long.

OFGEM use this identical methodology to set the value cap. On this replace, we’ve displayed costs in p / kWh, together with 5% VAT, to be in step with what our prospects see on their payments. The wholesale market want to cite UK wholesale fuel costs in p/therm, excluding VAT, which is why their figures may look a bit of completely 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 possibly can see that the chart for wholesale fuel costs settles at round 5p/kWh. Ofgem’s value cap takes this into consideration, in addition to further 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 will likely be mirrored in our tariffs from July 2023 onwards.

Whereas wholesale costs have 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 lowered retail fuel 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 in opposition to sustained will increase in wholesale costs. Which means if there’s a sudden enhance, our prospects gained’t need to pay the best costs.

‘Day forward’ costs can bounce round loads, primarily based on climate and different short-term elements.

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 larger due to elevated demand.

Wanting forward

Vitality markets are unpredictable, pushed by many elements together with climate, geopolitics (particularly the warfare in Ukraine), coverage and politics. Nonetheless, we will 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.

For the time being UK fuel 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 normal, and fuel storage ranges are presently excessive for this time of yr.

Nonetheless, you will need to do not forget that they nonetheless aren’t low in comparison with the common value from January 2010 to December 2019, which was 1.8p / kWh.

Wholesale Costs are falling – why am I nonetheless paying the identical fee?

1) Wholesale vitality costs are decrease than the height they hit in August, when fuel per therm reached an unimaginable 704p. Proper now, Fuel per therm is round 197p, however that is nonetheless excessive – in winter fuel often solely prices round 50p a therm. This implies proper now, vitality prices are 400% the conventional 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 firms 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 after they fall. There’ll be a lag – simply because the vitality value cap slows the value rises, it additionally slows falls – however vitality suppliers should not in a position to pocket extra revenue.

Current market modifications have been drawing a good bit of consideration.

Graphs like this one on circulating on social media have prompted loads of questions: why do these sources say fuel costs are 📉 when my costs are 📈?

What’s taking place within the wholesale markets?

Since lockdown ended and companies reopened, international vitality consumption has elevated quickly and considerably (notably in China). In 2021, Europe’s ageing vitality infrastructure struggled with reliability. There have been outages in various French nuclear turbines and northern fuel fields. This, coupled with escalating tensions between Russia and Ukraine which raised questions in regards to the reliability of Russia’s fuel provide, meant wholesale costs elevated, on the time, to report ranges.

In February 2022, fears have been realised as Russian troops invaded Ukraine. Europe has historically imported virtually half its fuel from Russia, however shortly discovered itself inserting sanctions on Russian firms akin to Gazprom. The provision of Russian fuel didn’t cease instantly, however was quickly lowered. Then in September there have been explosions on the vital Nord Stream pipelines that ship fuel from Russia to Germany, that means that, even when there may be quickly an sudden geopolitical decision, provides from Russia are prone to stay low for a while.

Extra not too long ago, some options to Russian fuel have been discovered and there have been some welcome falls in costs. Although a lot of continental Europe has historically been reliant on receiving fuel by pipelines, it will also be shipped as liquified pure fuel (LNG). International locations like Germany, the Netherlands and Finland have scrambled to construct floating LNG terminals and at the moment are importing fuel this fashion, and after an unexpectedly heat autumn, reserves are holding regular. Prospects are additionally consuming much less vitality because of excessive costs. All these elements have lowered wholesale costs, and costs have dropped, and while nonetheless extremely excessive, are round 1/3 of the height ranges seen in late summer time.

Nonetheless, we’re removed from out of the woods. Costs are nonetheless round 4 occasions larger than regular ranges. A sustained interval of chilly climate would shortly eat by our stockpiles. We’re extra uncovered to technical outages in key turbines and producers as a result of there are merely fewer out there replacements than there have been in recent times.

The place’s the cash going?

The vitality value cap GUARANTEES you’ll see decrease prices when fuel costs fall. There’ll be a lag – simply because the vitality value cap slowed the value rises (pushing them again to this October) it additionally slows falls – however you will be sure vitality suppliers should not in a position to pocket extra revenue.

Nonetheless, there’s no cap on the costs vitality turbines and producers can promote at. There can’t be – fuel and electrical energy is offered by personal firms on a world market. If there was a cap positioned on wholesale fuel and electrical energy within the UK then the vitality can be offered to different international locations as a substitute and we’d threat blackouts.

Globally traded Liquid Pure Fuel is vital for the UK and Europe to get enough fuel provides within the absence of flows from Russia. To ensure we obtain the quantity we’d like, we have to outbid the remainder of the world. Historically Japan and China are the most important 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 fuel isn’t any larger than earlier than. Nonetheless, the warfare and the rejection of Russian pipeline fuel has created a state of affairs the place the fuel is now despatched to the best bidder, no matter price.

So the place is the surplus cash going? General recipients will be positioned in 4 teams.

1. UK primarily based oil and fuel extractors. They’re incomes many occasions greater than normal for a similar fundamental prices. A few of them are seeing windfall taxes to assist cut back vitality prices however others are in a position to make use of “funding allowances” to scale back these taxes
2. International oil and fuel extractors – the vitality we purchase from them is many occasions dearer than normal, however they don’t seem to be topic to UK windfall taxes
3. UK fossil gasoline turbines – they’re exempt from windfall taxes so when electrical energy costs are excessive are in a position to make extra income
4. UK renewables turbines – SOME UK renewables turbines are making windfall income while others have mounted value contracts so should not. All UK renewables turbines are topic to windfall taxes to assist decrease payments (besides just a few small turbines).

How does this impression the value I pay for my vitality?

Proper now the vast majority of our prospects are on our Versatile Octopus tariff. The worth is presently set on a quarterly foundation primarily based 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 value that prospects pay between April and June 2023 will use a mean of the wholesale value between 17 November 2022 and 17 February 2023.

On high of the vitality value cap, the federal government has additionally launched the Vitality Value Assure, that means that a mean buyer can pay an quantity equal to £2,500 per yr by to 31 March (when it’ll rise £3,000 per yr).

If the Vitality Value Assure (a multi-billion authorities subsidy to all UK households) wasn’t presently energetic then the common invoice proper now can 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). Nonetheless, the interval that Ofgem makes use of to calculate these costs fell over a stretch in 2022 when wholesale costs have been at their highest.

Since then costs have fallen loads and if this development continues, this can feed into the costs prospects pay from April onwards.

A very powerful factor to know is that these graphs present the value to purchase vitality that day. We purchase vitality for our prospects upfront, by way of long run contracts, which has a unique value as a result of it elements future threat. Shopping for upfront, or hedging, means we will safe a specific value to your vitality for a number of months, smoothing out the value 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 have been completely large. We didn’t hike the value ten occasions larger 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 routinely put all our costs down.

Although fuel costs have quickly dropped, they’ve nonetheless fallen from ranges that have 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 obtained our £30 million Octo help fund in place, alongside a bunch of different sources, to assist present additional help to those that want it.

June 2022: “I’ve heard wholesale fuel costs have dropped loads. Why aren’t vitality tariffs coming down?”

This query’s been flying round for just a few weeks, so we needed to elucidate. For a brilliant fast learn, our CEO Greg tweeted a mini-thread a short time in the past:

The fuel value that’s dropped considerably is the day-ahead value. It’s the value to purchase fuel in actually brief contracts. Suppliers don’t actually purchase vitality that method, due to how unstable the market is everyday. We’d like to have the ability to provide secure, 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 fuel costs have dipped brief time period, the value to purchase a long run contract hasn’t come down the identical method.

Why hasn’t the long run fuel value dropped?

Long run contracts need to think about future dangers. Storage is low throughout Europe, plus, Russia, one of many world’s main fuel exporters, remains to be at warfare with Ukraine, that means low provides and shortages of fuel are anticipated this Winter. These main dangers are nonetheless factored into the value of long run contracts now – and sadly, all of the fuel the UK has proper now doesn’t assist a lot as a result of we will’t retailer it up to make use of after we want it.

Why has the brief time period fuel value dropped a lot?

The UK has a glut of fuel in the intervening time. That is making present fuel costs within the UK actually low cost. The difficulty is, we do not have the capability to retailer the fuel up to make use of after we actually need it later this yr in Winter. As a substitute, we’re exporting some fuel to Europe (although that is constrained by an absence of pipelines and the truth that loads of the fuel we’ve got is liquid, and Europe haven’t got loads of services to ‘regassify’ it) and burning all further fuel we’ve got to generate energy proper now. However with out storage, our long run subject of low fuel provide in Winter nonetheless stays.

Sky Information will get into this element rather more of their article “The surreal, but in addition actual, drawback of Britain’s fuel glut”, and the BBC’s Extra or Much less additionally featured an important 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 mirror that. We’re regularly reassessing our charges primarily based in the marketplace. No matter we do, we’ll do it in a method which means we will hold taking care of everybody by the disaster, hold working brilliantly for our prospects and workforce, and provide aggressive, truthful tariffs. We’re proud that our tech and working mannequin imply we’re a particularly lean, environment friendly enterprise, which meant we might 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 value cap. And we’re as relentlessly targeted on driving down prices to carry truthful costs for our prospects long run as ever. The truth is, 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 sometimes saved over £1,000 by now, vs in the event that they’d performed the identical with a Large 6 provider.

March 2022: With warfare escalating in Ukraine, vitality costs are 5 occasions larger than final yr.

Alongside unthinkable human tragedy, Russia’s invasion has despatched shockwaves by the worldwide vitality market. When we final blogged in regards to the vitality disaster six months in the past, vitality costs have been thrice 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, fuel costs have quickly spiked to a different all-time excessive – that means vitality prices us 10-12x extra at this time than it will’ve a yr in the past.

Issues are extremely unstable proper now, with market costs altering considerably in a single day.

What does this imply for Octopus Vitality’s costs?

We’ve been in a position to 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 serious 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 all the time achieve this, however we’re asking that you just give us a hoop to speak it by first to verify we will actually give you higher worth.

And naturally, for those who’ve already mounted your costs, your charges and expenses will not be affected till your contract ends.

Each day, vitality costs are actually unstable, and we’re having to alter our tariff choices rather more typically than normal. In case you’re renewing your contract and get a quote for a brand new mounted tariff sooner or later, it won’t be out there the day after.

Our vitality buying and selling workforce have their eyes glued to the market, on the lookout for prudent alternatives to safe energy as cheaply as potential to maintain your payments decrease.

Our value promise to you

We’re dedicated to truthful tariffs, the place your costs mirror the price of vitality, with a small margin on high 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 lower into our margins so we will enhance costs as little, and as late as we probably can.

Through the vitality disaster, we have have chosen to spend £100 million thus far to maintain your payments as little as potential. We have spent an additional £50 million to supply prospects the most cost effective variable tariff of any main provider, £48 beneath the Value Cap. In case you’re a buyer and you want to seek out out extra, examine Versatile Octopus and get in contact with us.

Alongside that, we’ve got supplied a 4% low cost on standing expenses for sure tariffs, in addition to providing 100,000 prospects in want the flexibility to use for a 6-months lengthy standing cost vacation. And after we can, we’ll carry costs down. We cross financial savings onto prospects each time potential – originally of 2020, when wholesale prices dropped, we have been the primary provider to chop costs. We’ll proceed to look at what’s occurring in wholesale and produce you the very fairest costs we will, endlessly.

The background to the vitality disaster: first revealed September 2021

In February 2021, Ofgem introduced an enhance to their vitality value cap to regulate for wholesale costs rising. At that time, costs have been 33% larger than they have been 6 months earlier than. Since then, costs have stored rising dramatically, pushed by a spread of things:

• Our international dependence on costly, polluting fuel. Regardless of an ever rising share of the UK’s energy coming from renewables, we’re nonetheless far too reliant on fuel (most of it imported) to warmth our properties and generate electrical energy, particularly after we want energy at brief discover – 39% of Nice Britain’s energy nonetheless comes from burning fuel. With that in thoughts, an imperfect storm has gathered, pushing International fuel costs to a 13 yr excessive. Sturdy post-Covid industrial demand throughout China has raised costs in Asia, so Liquified Pure Fuel (LNG) cargoes are presently selecting Asian fuel hubs over European ones, elevating costs right here.
• What’s extra, droughts in China and Brazil have additionally led to decrease hydropower technology, that means there’s extra competitors for fuel, 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 normal as nicely, leaving fuel 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 empty
• This, mixed with vital fuel and nuclear outages within the UK, and too few UK wind generators to generate energy from low wind ranges have led to extra fuel, and even coal, getting used for energy manufacturing – pushing already rising wholesale fuel and electrical energy prices to report ranges.

  That is but another excuse why we’re pushing so exhausting for a renewable revolution. As we generate extra electrical energy from renewable sources just like the wind and the solar (and transfer to impress heating) the UK will develop into much less uncovered to modifications in fuel costs. In the intervening time, nonetheless, when fuel is pricey, vitality will likely be too.