An informative narrative from Octopus Energy about the current energy crisis. It seems madness the way the electricity prices are calculated - nice extra profits for some of the generators for doing diddly-squat extra
"
What's caused this?
After the lockdowns around the world, global supply chains suffered from shortages, pushing prices up. But Putin's invasion of Ukraine sent gas prices skyrocketing to unprecedented levels and they've only got worse.
Where's the money going?
Put simply, oil and gas extractors. Whilst the cost of extracting gas hasn't increased, the global shortages have increased prices from 60p/therm to £4.80/ therm. To put it in perspective - the UK usually spends £11bn buying the gas to deliver to homes, and to generate electricity for them. This year that's more like £51bn.
Why is renewable electricity more expensive?
The UK has a single wholesale price for electricity — whether renewable or not. Indeed, renewable electricity costs more because we need to pay for certificates on top of the wholesale price. This is bonkers and we have frequently called for reform. This may happen but not in time for this year.
Is Octopus making a profit on this?
No. We've never made a profit, nor paid our shareholders a dividend, and won't do this year. Instead, we have put everything into helping customers.
For perspective, we'd usually pay £1.5b to buy all our customers' energy for a year. This year it'll be more like £9b.
What could the government do?
We were pleased when the government announced its existing support package in May, but since then prices have escalated and that means the package is hundreds of pounds less effective than it was originally intended to be. And with January prices likely to be dramatically higher still, it's clear that the existing support package is not enough.
Whilst there are many ideas, Octopus agrees with other energy companies that the best plan is to freeze the price around the existing cap level. This would be paid for by an industry-wide fund. We'll blog details shortly, but in short — while wholesale prices are higher, companies use the fund to deliver the price freeze and when wholesale prices drop, companies pay back into the fund. This would see prices at current levels for 2-4 years, and then fall over the next decade - especially as cheap renewables come online and market reform passes the savings to customers. Crucially, it would also reduce inflation by about 3.5%, helping reduce other costs across the economy.
Surely the government can't support energy bills forever?
Absolutely right. The markets expect global gas prices to come back down in two-ish years, or sooner if the war in Ukraine resolves. This is because right now, gas storage is being increased and supply chains are being built and re-routed globally so that the UK and Europe get more reliable and resilient access to gas.
At the same time, renewable projects are being accelerated in the UK and across Europe, and electricity markets will be reformed to help bring electricity prices down via cheaper renewables. The long-term thinking in the plans we propose helps absorb the volatile and high market prices in the short term and then bring prices down as gas and electricity markets improve. We don't need magic money, we need shock absorbers and market reform.
Are prices going up more in the UK than in Europe?
Wholesale prices are very similar across Europe but government response varies by country.
This very clear Reuters article is a good summary of the differences in government actions by country.
https://www.reuters.com/business/energy ... 022-08-15/
Is there hope?
Yes. The price freeze proposal would stabilise prices whilst we get long-term solutions in place. And then prices will drift down to not much more than half current levels over the next decade. We will continue to work extremely hard with the rest of the industry, government and other organisation to try to make this - or alternative solutions - a reality.
With regret and determination,
Greg Jackson
Founder, Octopus Energy"
. As the boss of Octopus Energy said (and I paraphrase) : "They should be building more capacity, not squandering their profits and expecting the public to put up with their under investment."