Why are Energy Prices not falling?

Chrysalis

Gas about 6.7p today.

ariarnia

michaels said:

Are we expecting Auxilione or Cornwall insights to update their price cap forecasts for April onwards?

i think they normally do it one period in advance. so when april is announced in mid febary they'll issue another forecast. 

tlcgrantham

Gas futures prices are low as far as September ( equating to less than 10pkwh) according to Ice. Agile goes negative again tomorrow as well. 

Qyburn

There must be costs on top of that. Does anyone know what a wholesale pr8ce of say 10p would equate to as a price to the end use?

tlcgrantham

The maximum of 10pkwh was my guesstimate of the retail price not wholesale. Octopus Tracker follows Day Ahead wholesale prices and when that price falls below 200 per therm the Gas Price falls below 10pkwh as pkwh as Chrysalis  above so that’s what we’re charged that day. 

       

michaels

Looks like offgem rules mean that each day suppliers have to purchase the gas to be supplied in 4.5 months time then the cap is set at the average over the 3 month observation period so 17 of November the price for the 1st April is set and so on daily till 17 Feb when the price for 31st May is set.  So today the price for the middle of April will be being set based on (I guess) the April delivery contract which is currently 186 which the discussion above suggests equates to a retail price of less than 10p per unit.

Of course prices have been higher for the first half of the observation period but it seems possible that the price cap may be below the increased gov ceiling for the April - June period. (3000 average usage cap).  

Hopefully one of the two companies who like to do the maths properly will publish an updated forecast soon.

[I wonder if the treasury has hedged its exposure which might turn out to be a very expensive decision. 
I wonder if Octopus are doing well supplying unhedged bulb customers]

Chrysalis

Note, some of the current cap is to allow suppliers to have faster recoveries, its not purely based on buy ahead wholesale costs? is an article here where a board member resigned in protest.  Ofgem is molly coddling the suppliers currently (frit of more closing down), press and consumers have slowly started to get wind of it.

The board member who quit quoted it as multiple 100s of pounds of the typical annual cost.  So seemingly a fair chunk of the October increase.

https://www.theguardian.com/business/2022/aug/17/ofgem-director-christine-farnish-quits-over-energy-price-cap

Also remember the consequences of Ofgem's refusal to isolate credit balances.

Ofgem told her that all but two UK energy suppliers would collapse this winter if the £400 charge was not brought in, according to a government source.

MattMattMattUK

Chrysalis said:

Note, some of the current cap is to allow suppliers to have faster recoveries, its not purely based on buy ahead wholesale costs? is an article here where a board member resigned in protest.  Ofgem is molly coddling the suppliers currently (frit of more closing down), press and consumers have slowly started to get wind of it.

I hardly see it as molly cuddling, Ofgem forced them to sell below cost for more than a year and even now limits them to a maximum of 2% profit.

Chrysalis said:

The board member who quit quoted it as multiple 100s of pounds of the typical annual cost.  So seemingly a fair chunk of the October increase.

https://www.theguardian.com/business/2022/aug/17/ofgem-director-christine-farnish-quits-over-energy-price-cap

Ofgem told her that all but two UK energy suppliers would collapse this winter if the £400 charge was not brought in, according to a government source.

A sector that was forced to sell below cost for more than a year, that has a maximum cap of 2% profit and was potentially going to be forced to sell below cost for another two years is hardly unfairly supported because prices are allowed to rise to a level where it can make 2% profit and not a loss.

Chrysalis said:

Also remember the consequences of Ofgem's refusal to isolate credit balances.

Some people had suppliers that went bust, some costs went onto standing charges, investors lost their money, energy costs were kept down overall. With hindsight ringfencing consumer balances would have stopped new entries to the market and meant that the SoLR cost would not go on the standing charge, however it would also have pushed costs up overall as all businesses would have to borrow to cover hedging so there would be a cost of finance which overall would have exceeded the cost of the SoLR process.

Mstty

I suspect the issue some will have is with customer service and IT systems taking up 20% of the cost of energy. With what appears to be worsening customer service are the suppliers skimming this area to make up for the losses in previous year(s).

Just something that crossed my mind this morning.

MattMattMattUK

Mstty said:

I suspect the issue some will have is with customer service and IT systems taking up 20% of the cost of energy. With what appears to be worsening customer service 

There was something in a news article that showd that calls and emails to customer service departments of energy companies had increased to twelve times the volume of previous years. Even worse almost all the increase of those calls were not actual customer services enquiries but people complaining that energy costs had gone up and demanding their bills be cut.

Mstty said:

the suppliers skimming this area to make up for the losses in previous year(s).

Just something that crossed my mind this morning.

They are not "skimming", they are regulated, they are financially audited and their profit is capped. If they cut costs in customer service any saving would count towards their 2% profit cap.