Important: The energy cost crisis: April and beyond

Octopus Energy - Turbine
Octopus Energy - Turbine

Important: The energy cost crisis: April and beyond

(This post is to stimulate thought, discussion and the formulation of policy, Winchester Labour does not necessarily endorse it.)

This message to customers from Greg Jackson CEO & Founder of Octopus Energy is a very good explanation of the current situation.

Dear Customer

With so much coverage of energy prices in the press, many customers are asking me for Octopus’s views.

Before I touch on that, let me start by saying: if you are having difficulties paying your energy bills, do let us know via our financial support tool. It can help you find government assistance you’re already entitled to, or additional support we’ve put aside for Octopus customers. Our team are here to help.

We started Octopus Energy to drive down energy costs by investing in efficient technology and cheap British generation. Indeed, if you joined us when we started you’d have saved over £1000 compared to the traditional energy companies.

But the UK (and other countries) currently faces a massive hike in bills as a result of global energy prices. There are things we can do to help UK citizens through this, but to do so we need energy companies and the government to work together.

While there’s a lot of coverage on energy costs — indeed I spoke to Newsnight on the topic recently — I worry many commentators don’t truly appreciate the size of the issue, or the urgency to act.

I won’t go into the background of the precipitous rises, but if you are interested, we go into quite some detail on our blog.

The key thing is this: the cost of the energy we’re buying on the global markets to supply our customers is three times higher than it was a year ago.

At the moment, customers on standard variable tariffs are protected from price rises until the Government price cap is updated in April. That means for an average home, we are currently buying energy for about £2000 and selling it for £1300.

However, when the cap is updated, it’s likely a typical bill will rise over 75% compared to the same time last year. That’s another £60 a month: a huge burden for most homes.

We speak to 30,000 customers a day and I know how important this is.

Octopus may be known for customer service and green energy, but affordability is absolutely fundamental to us:

  • We’re typically the first large supplier to cut prices and the last to rise
  • We’ve absorbed around £100 million of this wholesale price increase without passing it on to customers
  • We’ve set aside £2.5 million in additional funding to help customers struggling to pay
  • We’ve bought thermal cameras and lent them to customers for free, prioritising those who need the most support
  • We’ve invested £1 million in our Winter Workout programme, helping customers use less gas this winter

And yet, every time I speak to a customer, I wish we could do more.

But the truth is this is an issue Octopus can’t solve alone.

There has been a lot of discussion about what should be done to protect people from these rises. There are several options being considered by Ofgem, government and the energy industry:

  • Spreading the cost over several years
  • Removing VAT and environmental levies from energy bills
  • Extending the warm home discount to more customers

All of them can help, but the most impactful of these options is spreading the cost over several years, because it’s the only one big enough to make a real difference to all customers.

It’s impossible to know when wholesale prices will return to normal levels, but the issues leading to the rise are mostly temporary.

Spreading the cost of this sudden spike over several years will allow us to make the imminent April rise much, much smaller — more like £12 per month — and adjust prices to gradually cover the cost over time.

And with the benefit of time, the gradual rises are likely to coincide with falling wholesale prices, making the effective increase much smaller, and eventually dropping below current prices.

Should there turn out to be structural issues with our energy market that mean wholesale prices stay high or push even higher, then we will have greater time to deal with these at a national and international level, rather than just passing the bill straight through to households and forcing many into fuel poverty overnight.

Private funding can be found for deferring these costs which means we may be able to do it without Treasury funding (of course that may be an option too).

Removing VAT and levies, and extending the Warm Home Discount would also be helpful — and indeed a combination may prove the best option overall. It is vital we don’t allow extra complexity to delay action however.

We believe it’s past time that environmental charges were removed from increasingly green electricity. Removing environmental levies and VAT will save a typical home around £220 a year, so in the light of £700 rises, clearly more is needed alongside this.

An extension to the warm home discount scheme has the benefit of directing help to where it’s most needed.

As it stands, the warm home discount provides £140 respite to around 2.2 million homes. With National Energy Action estimating at least 6 million households could fall into fuel poverty should the wholesale rises be passed on without some form of support, we will need to massively increase both the number of people eligible, and the amount of support provided.

Currently the Warm Home Discount is funded by a social levy that applies to all energy bills, so increasing support for eligible customers will lead to even larger increases for everyone else.

We are putting enormous effort in, alongside many others: energy suppliers, Ofgem and the Government, to try and ensure there is decisive, collective action that best protects as many households as possible.

Honestly, I don’t know if we’ll be successful.

But if we aren’t, it won’t be from lack of trying. Right now, this is our number one priority.

I hope this email has been useful. If you have a moment to share your thoughts, I’d appreciate it — you can do that via this link.

If you’d like a further update once we know what action the Government, Ofgem and the industry intend to take, let me know here.

Finally, if you’d like to read more about these issues, you’ll find a range of coverage throughout the media:

Kind regards,
Greg Jackson
CEO & Founder
Octopus Energy

Ps. if you’re worried about what you should do in the meantime, remember to let us know if you’re facing financial difficulties, and perhaps have a read of the blog post that Rebecca, our Marketing and Product Director, has written to help customers who are coming to the end of their fixed term make informed decisions about their tariffs at this difficult time.

Pps. If you’re wondering why renewable energy is more expensive during a gas crisis, it’s because electricity generators usually have contracts which tie their price to the “market”, which is usually set by gas. This is outdated, and we’d love to see it change, but it’s just how the UK system is set up. The good news is most recent renewable generation actually pays customers back when market prices are high, and this is slightly reducing overall bills.