What should the unit prices be to cover wholesale prices?

MWT

QrizB said:

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).

You can see the methodology if you look at the 'Annex 2 - Wholesale cost allowance' spreadsheet which Ofgem publish (with commercial data redacted).

MWT

This may help explain the '6-2-12 methodology' referenced in the Annex 2 spreadsheet...

https://www.cornwall-insight.com/the-default-tariff-cap-and-the-law-of-unintended-consequences/

Sea_Shell

@QrizB

Do you think that OFGEMs predicted cap of £2800 has somehow factored in this week's surge in "spot price" gas?

Will it affect the cap if today's pricing of ~280p/therm is maintained until the end of July?

QrizB

Sea_Shell said:

@QrizB
Do you think that OFGEMs predicted cap of £2800 has somehow factored in this week's surge in "spot price" gas?
Will it affect the cap if today's pricing of ~280p/therm is maintained until the end of July?

The current cap of ~7.5p/kWh was based on wholesale gas prices of 4.9p/kWh, roughly 145p/therm.

Ofgem's anticipated cap of around 11-12p/kWh would suggest a 4p/kWh average wholesale price increase. Say 9p/kWh, 265p/therm.

So no, I can't see six weeks at 280p/therm having a huge effect on the six-month average, as the average is already close to that number.

If it goes significantly above 300p/therm and stays there, well, it might nudge the October cap upwards. And of course we're now into the observation period for the proposed January cap, so that could turn out higher than expected.

Sea_Shell

QrizB said:

Sea_Shell said:

@QrizB
Do you think that OFGEMs predicted cap of £2800 has somehow factored in this week's surge in "spot price" gas?
Will it affect the cap if today's pricing of ~280p/therm is maintained until the end of July?

The current cap of ~7.5p/kWh was based on wholesale gas prices of 4.9p/kWh, roughly 145p/therm.

Ofgem's anticipated cap of around 11-12p/kWh would suggest a 4p/kWh average wholesale price increase. Say 9p/kWh, 265p/therm.

So no, I can't see six weeks at 280p/therm having a huge effect on the six-month average, as the average is already close to that number.

If it goes significantly above 300p/therm and stays there, well, it might nudge the October cap upwards. And of course we're now into the observation period for the proposed January cap, so that could turn out higher than expected.

Many thanks.  Great insight, as always.

Mstty

Of course we shouldn't forget the power the energy companies have to influence Ofgem with their bottom line. The calculations could include additional profit margins especially if they are all showing losses.

Lots of factors to include not just price per therm.

QrizB

Another month, another forecast. For reasons I've mentioned previously - the cap being based on forward prices, not spot ones, and forward gas prices still being extortionate sorry, "firm" - it's likely that my forecast will come in low.

See this post for a table of what Cornwall Insights are projecting (and their forecasts are likely to become more accurate during July).

------

Five months of the current six-month pricing period are over, only one month to go - and then some time in august we'll learn what the October cap will really be.

Prices during June started low but picked up significantly during the last week or so. Wholesale gas ranged from 0.35p (yes, really) to 6.80p/kWh, electricity from 4.7p/kWh to 27.4p/kWh (yes, really).

I'm contiinuing to use day-ahead electricity prices are from Nordpool and gas prices are from Guy Lipman. Last pricing period I came up with 6.5p/kWh for gas and 17.4p/kWh for electricity; Ofgem used 4.9p/kWh for gas and 16.6p/kWh for electricity when deriving the April cap.

Average prices for June are lower than February, March or April but up somewhat from May.

• February - gas 6.33p/kWh, electricity 16.2p/kWh
• March - gas 10.34p/kWh, electricity 25.0p/kWh
• April - gas 5.66p/kWh, electricity 17.7p/kWh
• May - gas 3.13p/kWh, electricity 12.5p/kWh
• June - gas 4.36p/kWh, electricity 16.0p/kWh
  

This gives us an average wholesale price for the period to date of 5.96p/kWh for gas and 17.5p/kWh for electricity, which in turn suggests that the retail price of gas will fall to 7p/kWh, and electricity stay pretty much the same at 28.3p/kWh, leading to a small fall in the Ofgem cap.

Given all the news and warnings that prices are set to rise in October this seems pretty nonsensical so, while I will continue to give an update at the end of July (completing the pricing period), I'm not going to make any firm predictions. Look at the Cornwall Insights numbers linked above and hope for another mild winter.

As I type this, wholesale gas prices from September 2022 to March 2023 are all well over 300p/therm (10p/kWh) and November to January are close to 400p/therm (13.6p/kWh).

(One thing this does show, however, is that Octopus Tracker [the source of my gas data, and a close mirror of my electricity data] has worked out cheaper than the capped SVT when averaged over the last five months. As I'm a Tracker customer for gas, it will be interesting to see if this continues to be the case as we move into the second half of the year.)

MWT

QrizB said:

Another month, another forecast. For reasons I've mentioned previously - the cap being based on forward prices, not spot ones, and forward gas prices still being extortionate sorry, "firm" - it's likely that my forecast will come in low.

'firm' is a very generous way to put it...

QrizB

MWT said:

'firm' is a very generous way to put it...

Somewhere there will be a commodities trader who bought gas for winter 22 back in mid-2020 for 45p/therm and has one hand hovering over the "sell" button while the other hand turns the pages of this month's Yachting World!

MWT

QrizB said:

Somewhere there will be a commodities trader who bought gas for winter 22 back in mid-2020 for 45p/therm and has one hand hovering over the "sell" button while the other hand turns the pages of this month's Yachting World!

Perfect timing! ... I hear there are some great deals to be had with ex-Russian owned yachts right now