What should the unit prices be to cover wholesale prices?

Sea_Shell

Great work QrizB.  

Are those figures inc VAT?  

What S/C are you using, approx 25ppd per fuel? 

merchcon55

QrizB said:

Based on the past 5 months, the average price of gas is 6.37p/kWh and electricity is 17.1p/kWh. If prices don't fall significantly below this average during January this suggests an April cap of:

• around 8.3p/kWh for gas;
• around 31.1p/kWh for electricity;
• a headline Ofgem cap price for an average dual-fuel consumer of ~£2080pa, compared to the current £1277pa. That's a 63% increase.

PS this all assumes there's no meddling in the background and the calculation scheme is unchanged. Obviously if Ofgem moves the goalposts, all these forecasts will just be a minor historical curiosity.

Would I be right to assume that you are using historical mark ups from wholesale prices for the suggested April cap? If yes, then we would need to add on top of this, a "contribution" all of us must pay for the SOLR paybacks for taking onboard loss making customers since October up to the start of April.

QrizB

Sea_Shell said:

Great work QrizB.  
Are those figures inc VAT?  
What S/C are you using, approx 25ppd per fuel? 

I've made no specific allowance for VAT, beyond that made by Ofgem in their October 2021 cap calculations. VAT could add another 0.2p/kWh to gas and 0.5p/kWh to electricity prices.

I've assumed no change to the standing charge element of the cap, so continuing at ~£90/yr per fuel.

merchcon55 said:

Would I be right to assume that you are using historical mark ups from wholesale prices for the suggested April cap? If yes, then we would need to add on top of this, a "contribution" all of us must pay for the SOLR paybacks for taking onboard loss making customers since October up to the start of April.

I have only calculated the effect of the increase in wholesale costs. All other contributions to the cap are assumed to remain unchanged from October 2021. I've not added anything specific for 2022-23 SoLR charges and you're right, that could be an additional £50-100/household.

wakeupalarm

If the new cap is going to be £2080 ish that is going to add £800 to the current cap.

Removing VAT from bills, will only knock off £100.
Removing the Green levies will knock off another £200
Add in the SOLR cost will add £100

Net result £1880 ish

Clearly something more drastic has too be done as these figures are going to devastating for low and even middle income households.

Even if you spread out the costs over 10 years as suggested by some in the Energy supply industry that will still add £80 a year plus interest for the next 10 years.  And that's just to cover this years figures, what happens if energy wholesale prices remain high, even if not at current levels, for years to come.

This has been a complete failure of planning and regulation with a massive cost.

QrizB

In response to the (entirely reasonable) comments from @Sea_Shell and @merchcon55 I've revised my model (I'm reluctant to say "improved").  I've inserted another page to my spreadsheet with the historical data table from this Ofgem page and have then added a new line for my Summer 2022 forecast. I can now break out and tweak all nine elements that make up Ofgem's default tariff cap, including network costs (where SoLR costs have historically shown up) and VAT.

I'll let you know what this gives me tomorrow, once I have double-checked a few things.

Thrugelmir

wakeupalarm said:

This has been a complete failure of planning and regulation with a massive cost.

The green agenda is likewise influencing banks lending and companies investing. Shortsighted in itself. 

QrizB

OK, I can't see any glaring anomalies so here's what I've got. A reminder this is based on historical data table from this Ofgem page then revised to reflect the current expectations. In roughly decreasing order (but with VAT last):

1. Wholesale costs. This is the big change. In Oct 21 these were £528. If wholesale gas is 6.37p/kWh and electricity is 17.1p/kWh, the cost of (12000 + 2900)kWh rises to £1260 (+£732).
2. Network costs. In Oct 21 these were £268. This is where SoLR costs usually show up so I'm increasing this to £320 (+£52).
3. Operating costs. In Oct 21 these were £204. Historically they've risen gently so I've used £205 (+£1).
4. Policy costs. In Oct 21 these were £159. These might fall in 2022 (as the green levy falls) but if the WHD is expanded they might just as easily rise. I've kept them at £159.
5. EBIT. In Oct 21 this was £23 and I'm keeping it at £23.
6. DD payment allowance. In Oct 21 this was £12 and I'm keeping it at £12.
7. Headroom allowance. In Oct 21 this was £14 and I'm keeping it at £14.
8. Adjustment allowance. In Oct 21 this was £9 and I'm keeping it at £9.
9. VAT. VAT in Oct 21 totalled £61; on my revised numbers it totals £100.

What does that give as a headline Ofgem cap figure for April 22? £2102. Almost all of this is down to the increase in wholesale energy, my other additions total £53+VAT.
What's striking to me is that wholesale prices plus VAT - without any of the other add-ons - are already higher than the pervious cap.

Verdigris

Sterling work again, QrizB.

And I've barely drunk my first cup of coffee!

<hangs head in shame>

merchcon55

Beyond impressive @QrizB

Without wanting to turn this subject political - another place and time for that - I believe every country in Europe is going to face similar issues - as pointed out above, the huge majority of anticipated price rise in the cap will be due to Wholesale Price Increases.

I do wonder if this will re-open the subject of fracking. As it would happen this island is apparently blessed with the potential for huge amounts of gas from fracking. Again, not the place here for this discussion - just thinking out loud for now.

QrizB

merchcon55 said:

I believe every country in Europe is going to face similar issues - as pointed out above, the huge majority of anticipated price rise in the cap will be due to Wholesale Price Increases.

I wouldn't want to even try and guess what the spot price of gas will be next winter, but it's interesting that the current futures price at the ICE is (give or take 10%) around 200p/therm (ie. 6.8p/kWh) from February until March 2023. As it takes about 2.5kWh of gas to make 1kWh of electricity, the equivalent electricity price is 17p/kWh.

If I was an energy company wanting to offer a 12-month fixed rate, those are the prices I'd have to hedge at. And both of those numbers are similar to the wwholesale prices I used when calculating that £2102 cap.