Why we need to increase our prices
Back in April we took the opportunity to lower our prices, with the average Igloo customer saving over £175 a year. Since then we have seen both network and wholesale costs increase dramatically following the impact of Covid-19 and lockdown.
Energy wholesale markets have increased more than 30% since April. The costs associated with keeping your home connected to the grid, transporting energy to your home and the upkeep of that network has also gone up.
We’ve absorbed these increased costs for as long as possible, but we now need to raise our prices. From the 15th October 2020 we will be increasing prices by 10.9% for a typical Igloo dual fuel home.
Keep reading as we explain the factors that affect the price of energy and how it has changed over the last few years.
Wholesale energy costs account for around 40% of the typical UK household fuel bill. This price isn’t fixed, just like buying petrol for your car, the price constantly changes based on global supply and demand. As the cost of things like oil and gas change, so does what we pay for the energy we buy on your behalf. It is our job to monitor these changes and protect you from this volatile and constantly changing marketplace.
When COVID hit and the country went into lockdown, few areas of society were left untouched resulting in a huge drop in demand for energy from business and manufacturing. This reduction in demand resulted in a drop in the cost of energy as there was more available than could be used. In April we passed this saving on to you.
Since then the country has started to get back to our new normal (whatever that might be), manufacturing and businesses have started to return to work and demand has increased. The energy market has reacted to this increase in demand and costs have started to go up.
Network and policy costs
It may come as a surprise to you to hear that approximately 41% of a typical dual fuel bill is made up of costs imposed by the regulator to keep the energy network running smoothly. Some of these are shared by everyone who uses the network based on the proportion of energy that they consume.
Imagine going to dinner with four of your friends to a restaurant that only offers a set meal for five. Your friend Angus ‘AKA the factory unit’ has a bigger appetite than the rest of you, so when it comes time to pay, he does the noble thing and offers to pay for a double share. Fast forward a few months and you go back to the same restaurant but because of lockdown Angus couldn’t make it. You now have the same meal, at the same cost but you’re now only splitting the bill between the three of you.
The same scenario applies to these network and policy costs. Due to lockdown, the proportion of energy being consumed by businesses dropped significantly. As a result, more of cost has been passed on to domestic energy customers like you.
Three network and policy costs that affect your energy bill:
CfD is a government subsidy paid to generators of green energy. When a generator commits to making low-carbon electricity they are made a promise that they will never sell their energy for less than it costs to make it. This helps ensure that we continue investing towards a greener energy network.
When demand is low and the price of energy drops below the cost of generating it, these generators are paid the difference through CfD, some of this cost is passed on to supplier like us. This is one of the factors we must consider when setting our price of energy.
Feed in Tariff (FiT)
If you have a solar panel on your roof or a wind turbine in the garden, you’ll know all about FiTs.
The Feed in tariff is money that microgenerators get paid for making green electricity and selling it back to the National Grid. The cost of this is passed on to suppliers based on market share.
During lockdown, the sun was out, demand was low, but solar panels were helping power the nation. The proportion of energy being consumed from these sources increased, the percentage of energy going to businesses decreased and as a result the increased cost of FiTs has been passed on to domestic customers.
Balancing Services Use of System (BSUoS)
When electricity is generated and enters the network it has to go somewhere, it is a balancing act to make sure that the grid doesn’t generate too much or too little. It is the job of National Grid to make sure that everything goes to plan, and to do this they have a selection of methods available to them. One of these techniques is to shut down power stations when their capacity is not required. Every time this happens the generator is given money through the BSUoS scheme to pay for the electricity that they could’ve generated during the time they were asked to shut down. Without this security we might find that we have a shortage of power stations in the future.
As mentioned before, demand was low these last few months, while green energy production was high and as a result the increased cost of keeping the network balanced has been passed on to energy suppliers like Igloo through BSUoS charges.
In May, National Grid estimated that this could cost consumers and business as much as £500 million pounds
The energy price cap
Recently you might have heard the news that millions of customers would save as much a £84 a year thanks to the governments default tariff cap. This has given many consumers a false impression of what is actually happening in the energy market.
Not everyone will see their bills drop as a result of the price cap change. In fact, it really only affects those people who are on poor value default tariffs. If you’ve already switched to Igloo, the price cap is irrelevant as our prices are already significantly lower. Ofgem, the energy regulator for Great Britain, only introduced the price cap back in January 2019 to prevent greedy energy suppliers lining their pockets at the expense of households.
The price cap is also slow to react and does not actually give customers the best deal. In fact, one could argue that the price cap reduction is only just starting to take the impact of Covid-19 into account. At Igloo, we don’t play that game, instead we are committed to offering a fair value for energy that tracks the wholesale cost of energy as best we can.
Even after our price increase takes affect on October 15th, we are still 14% cheaper than the recently announced default price cap. You can see from the graph we have been consistently way below the level of the tariff cap.
We’re always looking to give you the best
We know that increasing prices is never good news and it’s not something we take lightly, the last time we did this was way back in September 2018. Our team are constantly monitoring the energy market and we hope that by passing on the reduction in April, which many didn’t, it gives you confidence in our mission to give you the best possible deal.