Energy prices have been steadily increasing over the past year. We’ve also seen extreme weather events which have impacted the energy market. We often get asked by our customers what this means for them. As the UK starts 2019 with a new price cap, we’re here to help answer some of the most common questions.
What is the price cap? The price cap was introduced by energy regulator Ofgem and sets the new limit on gas and electricity bills that will save UK consumers around £1bn per year. The price cap was proposed at £1,137 per year for a typical dual fuel customer paying by Direct Debit. Suppliers must now ensure their standard variable tariff is at the cap or below. The price cap will be reviewed in April 2019, in order to reflect market prices.
What has caused price rises over the past year? Over the past year, we’ve seen wholesale energy costs rise by nearly 50 per cent. Gas prices had been relatively stable for a couple of years up until the end of last winter. Comparatively to other winters, it wasn’t particularly cold. However, it was also the first year without Rough. Rough is a former natural gas storage facility situated off the east coast of England. Its closure prompted warnings that the country would face more volatile winter gas prices and in turn, become more dependent on energy imports from Europe. The knock-on effect of this over the summer meant we were exposed to a continued reliance on continental storage, which led to price rises.
How do gas prices differ to previous years? When the ‘Beast from the East’ hit the UK in February 2018, we saw an extremely high demand for gas. This led to higher prices in the short term and gas storage levels depleting to meet the demand. It’s fair to say, it wasn’t a normal year for energy! This summer we saw coal and Carbon Certificate prices rising, which resulted in a need for increased gas-fired electricity generation across Europe and kept gas prices high. This energy complex was feeding off itself and this pushed up prices.
From this complex, we have seen tariff prices respond to cost movements, including non-wholesale costs. The graph shows the impact of environmental COGs (cost of goods sold) that are increasing rapidly.
Currently, we’ve seen a decline in short-term gas prices. This is due to the warmer start to winter, leading to a much-needed injection of storage across the continent. Our prices are exposed to what’s happening on the continent due to our dependency on Europe’s storage facilities. The less storage there is, the more volatile the market becomes.
What does this mean for OVO Energy customers? For OVO Energy customers on a fixed price deal, we’ll buy enough energy for two years and lock in costs. These customers are protected from the wholesale price movements. For customers on a variable tariff, we buy their energy on a rolling basis, so as wholesale prices rise our cost prices rise. As our costs have gone up, we’ve had to do a number of variable price rises to maintain a reasonable level of growth margin so we can operate as a sustainable business.
Does this mean the price cap will make things difficult? The price cap does cause additional risks for suppliers, as we need to forecast and buy the right amount of energy at the right time. The standard variable tariff cap will not harm consumers or competition – rather, it will act as a catalyst for innovation and efficiency amongst suppliers. It will be painful for some companies, especially those currently taking advantage of customer disengagement, but it will offer consumers a safety net, protecting them from some of the worst practices of the industry whilst still allowing innovative suppliers to compete. The price cap will lead to lower average prices across the industry, saving customers hundreds of millions of pounds. However, on 1st April 2019, the price cap will be reviewed and the mechanism for pricing will take into account changes in the energy market.
Will you be making any more price rises? Making a standard variable tariff price change is quite a long process, so we only raise prices after forecasting and ensuring we can balance being a sustainable business while giving our customers a fair price. We decreased our standard variable tariff in December to £1137.