What should the unit prices be to cover wholesale prices?

markin

Is the way they come up with the price set in law? Could they just predict what it could be in  Oct, Nov, Dec based on last year plus EU expected demand?

Mstty

markin said:

Is the way they come up with the price set in law? Could they just predict what it could be in  Oct, Nov, Dec based on last year plus EU expected demand?

An older Ofgem price cap document but maybe of use

https://www.ofgem.gov.uk/sites/default/files/docs/2018/11/appendix_4_-_wholesale_costs.pdf

@QrizB maybe you have seen this before?

Alnat1

I thought the price for Oct was based on prices up to July but I was a bit confused by the bit that said "A final decision will be taken in August on the basis of how much companies are having to pay for their future supplies on the wholesale market."

Can someone explain it really simply to me please.

QrizB

Mstty said:

markin said:

Is the way they come up with the price set in law? Could they just predict what it could be in  Oct, Nov, Dec based on last year plus EU expected demand?

An older Ofgem price cap document but maybe of use

https://www.ofgem.gov.uk/sites/default/files/docs/2018/11/appendix_4_-_wholesale_costs.pdf
@QrizB maybe you have seen this before?

Yes, I've seen that, thanks for sharing it on the thread!

It's not law but Ofgem does exactly how it works out the cap; that document is part of it.

Alnat1 said:

I thought the price for Oct was based on prices up to July but I was a bit confused by the bit that said "A final decision will be taken in August on the basis of how much companies are having to pay for their future supplies on the wholesale market."

The October cap is meant to be based on wholesale prices from Jan to Jul, as you state. It's written into para 2.9 of the pdf that Mstty linked to. It would normally be announced in early August. This ties up with their statement.

Per the pdf, Ofgem use "a 12-month weighted average of forward contracts" to determine their wholesale prices, rather than the spot market prices I've been using (I can't easily produce a direct analogue to Ofgem's data, since it's a paid-for product).

markin

Mstty said:

markin said:

Is the way they come up with the price set in law? Could they just predict what it could be in  Oct, Nov, Dec based on last year plus EU expected demand?

An older Ofgem price cap document but maybe of use

https://www.ofgem.gov.uk/sites/default/files/docs/2018/11/appendix_4_-_wholesale_costs.pdf

@QrizB maybe you have seen this before?

Had to google the link for it to work.

The 'Consultation' on the '3 Month' is needed for them to change the law for that part, They probably just add a high % For 'additional risk and uncertainty losses'

Additional direct fuel allowances

2.13.

Our valuation of wholesale costs based on forward contracts does not capture all of the

wholesale costs that suppliers face.

2.14.

To address this, we include additional allowances to cover the costs of:

shaping, forecast error and imbalance costs  transaction costs

additional risk and uncertainty losses and UIG

2.15.

We calculate the

additional allowances for shaping, forecast, imbalance, and additional

risk and

uncertainty by applying

a fixed percentage to the direct fuel costs we calculate

based on forward contracts. The proposed allowances are set out in Table A4.5

Domestic Gas and Electricity (Tariff Cap) Act 2018

https://www.legislation.gov.uk/ukpga/2018/21/section/6/enacted

Review of level at which cap is set

(1)The Authority must, at least once every 6 months while tariff cap conditions have effect, review the level at which the cap is set.

9 Protection for domestic customers after termination of tariff cap conditions

(1)Before the tariff cap conditions have ceased to have effect as provided by section 8, and afterwards at such intervals as the Authority considers appropriate, the Authority must carry out a review into—

(a)the pricing practices of holders of supply licences for the supply of gas and electricity under domestic supply contracts, and

(b)whether there are categories of domestic customers paying, or who may in the future pay, standard variable and default rates for whom protection against excessive charges should be provided.

(2)Such a review must, among other things, consider—

(a)whether there are domestic customers who the Authority considers will suffer an excessive tariff differential where on the termination of fixed rates the customers move to standard variable or default rates, and

(b)whether customers who appear to the Authority to be vulnerable by reason of their financial or other circumstances are in need of protection.

(3)If the review concludes that protection should be provided, the Authority must take such steps as it considers appropriate by the exercise of its functions under the Gas Act 1986 and the Electricity Act 1989.

Uxb1

Companies buy ahead their future energy in the energy futures market.
So some international middleman/broker will offer to an energy distribution company so many megawatt hours of energy for a fixed price and that price will be higher than the day's spot price as in effect the energy companies are transferring the risk of prices over the winter moving up or down from themselves to the broker.
If the price move up a lot the energy company wins as the broker now has to buy real energy for a higher price than he already already committed to supplying it to the energy customer.  If prices drop then the energy company looses as now the broker can buy energy much cheaper and still sell it to the energy company at the agree higher price.

We do not yet know what the future price of energy for winter delivery are - but by August we will.

wakeupalarm

QrizB said:

I realise that even my upper estimate (which assumes June and July are as expensive as March was) is well below Ofgem's £2800 figure, and remain unable to explain the difference. Ofgem's number is equivalent to retail prices of about 11p/kWh for gas and 40p/kWh for electricity, plus the current standing charges.

Are the SOLR costs from last September onwards already included in the cap calculation?  I remember reading somewhere that they were not added to consumer bills until after 1 year.

Another strong possibility is that Ofgem just makes the figures up and there is no formula.

Spies

SoLR costs are why the electric standing charge has shot up... 

pochase

On 24th of May

Cornwall Insight’s forecast for the October (Q4 2022) Default Tariff Cap have increased to £2,790 for an average consumer, with the January (Q1 2023) Cap now rising to over £2,800. This is following updated guidance from Ofgem on their proposed shift to quarterly calculations, as well as recent developments in the wholesale gas and electricity markets.

https://www.cornwall-insight.com/press/cornwall-insights-price-cap-predictions-jump-after-ofgem-release-new-guidance/

Question is what has changed that Cornwall had now the same £2800 Ofgem used in it's letter on the same day? What is the updated guidance?

Yesterday Cornwall increased it's estimate by another £90 to £2879.71.

Mstty

A quick fag packet calculation on Cornwall insights new figure for October given this "new information" from Ofgen suggest on October price cap rate of 41.2p kWh Elec and 11.8p kWh Gas if the SC stays fixed as it is currently.

Wow!

https://www.cornwall-insight.com/press/price-cap-predictions-soar-as-eu-sanctions-on-russia-cause-volatility-in-the-wholesale-market/