Octopus Energy doubts industry can rescue households from soaring energy bills
Octopus Energy (Octopus) founder Greg Jackson has questioned whether the energy sector and government can rescue households from a painful spike in energy bills this spring.
In an open letter to the supplier’s three million customers, he said he did not know “if we’ll be successful” in containing rising energy prices, with the consumer price cap expected to rise by as much as 50 per cent in April to £2,000 per year for average use.
The industry has been battered by soaring wholesale energy costs over the past six months, with dozens of suppliers collapsing and Bulb Energy (Bulb) being propped up by £1.7bn of public money until a new buyer is found.
The market carnage has directly affected over four million customers, with regulator Ofgem routinely ferrying customers from fallen firms to surviving suppliers over the winter.
Ofgem is set to announce the new prices households will face on 7 February, and the industry trade body Energy UK has gloomily predicted that prices could go up again in October when the cap is reviewed for a second time this year.
The government is expected to announce measures to protect low income households, with reported plans under consideration ranging from £500 one-off payments to public money loans for suppliers during future market shocks.
Meanwhile Business Secretary Kwasi Kwarteng met with industry chiefs over Christmas and New Year to discuss potential ways to protect households from soaring costs.
Both parties agreed in principle to bring in measures to reduce rising costs, but since then no specific policies appear to have been agreed.
Jackson said talks were continuing with the industry pushing to reach an agreement with the government on methods to cut bills down.
He said: “We are putting enormous effort in, alongside many others: energy suppliers, Ofgem and the government, to try and ensure there is decisive, collective action that best protects as many households as possible.”
If the attempt to reduce bills fails, he claimed “it won’t be for the lack of trying.”
Jackson favours spreading the costs for consumers as industry recovers from soaring wholesale costs
Weighing up potential options to resolve the crisis, Jackson told customers he favoured spreading increased energy costs over multiple years rather than forcing households to face significant hikes this spring.
He suggested private funding should be used to spare energy consumers from an instant surge in bills, but also said Treasury support remained a viable option.
This follows his comments to the BBC earlier this month, where he argued the industry should do all it could to reduce household costs before resorting to the public purse for help.
He said other options, such as removing VAT and green levies from bills and extending the Warm Home Discount, would not be enough on their own to make a significant difference and just shift the financial burden elsewhere.
Jackson explained: “The key thing is this: the cost of the energy we’re buying on the global markets to supply our customers is three times higher than it was a year ago.”
The chief executive also noted that consumers have so far been insulated from the realities of the market, as the current £1,277 price cap has meant Octopus has lost money on customers with the standard variable tarrifs.
He outlined that Octopus is currently buying energy for about £2,000 and consequently making a £700 loss on each consumer, while it has also incurred further costs from picking up households, such as the 580,000 consumers Octopus scooped up from bust firm Avro Energy.
This would change when the price cap is increased over the coming months, and that a typical bill could rise as much as 75 per cent this year, with price-saving plans also likely to hit the scrapheap.
He said: “Spreading the cost of this sudden spike over several years will allow us to make the imminent April rise much, much smaller – more like £12 per month – and adjust prices to gradually cover the cost over time. And with the benefit of time, the gradual rises are likely to coincide with falling wholesale prices, making the effective increase much smaller, and eventually dropping below current prices.”
The possibility of more public money being involved in further deals has received push back from think tanks such as the Institute for Economic Affairs and the Adam Smith Insitute.
The Chancellor, Rishi Sunak, has reportedly also raised doubts over the idea of more public money for loans.
Not only would the measures rely on the assumption that energy prices would go down over time and that higher prices were not baked in, but would also require further government meddling in the market.
Speaking to City A.M, the IEA’s economics fellow Julian Jessops questioned why the taxpayer should bear the risk of price fluctuations when “market incentives can only work properly if risks are shared by consumers and suppliers”.
John Macdonald, director of strategy at the Adam Smith Institute has also slammed the consumer price cap.
He said: “The government has deprived the market of its ability to operate under pressure. The price cap forces providers to sell at or near a loss, stifling competition and distorting the price signals that allow consumption and investment to shift with scarcity.”
However, the International Monetary Fund said yesterday there was a case for targeted UK support – while warning tensions over the Russia-Ukraine crisis threatened to intensify prices further.