Wholesale prices are lower than ever, but many consumers won’t realise these savings
You may have seen a drop in energy prices in the news with scary headlines like “Natural gas prices could go negative on global oversupply”. In the UK wholesale energy prices are down 44% comparing April 2019 to April 2020. However, most consumers will not be seeing this price-drop coming through in their monthly energy bills.
If suppliers can buy energy at a lower cost, why isn’t this being passed on to UK households?
Firstly, there are multiple factors that contribute to a household’s monthly energy bill. On top of wholesale costs your bill also has to cover network costs, operating costs, taxes, environmental and social schemes. According to Ofgem wholesale prices make up only 38% of a typical energy bill. These contributing costs haven’t seen the same drop as the wholesale price, so we wouldn’t expect a 44% drop in wholesale prices to equate directly to 44% drop in energy bills.
However, the wholesale price drop should still equate to a saving. If 38% of a bill is wholesale prices, and this has fallen by 44%, we can multiply these numbers together to get an estimated consumer saving. You should be seeing a drop in your energy bills of around 17%.
For an average household that equates to a saving of £16 per month, or £200 per year.
So, are you seeing a £16 monthly saving? Probably not.
One good reason you may not be seeing the saving is if you have already chosen a competitive fixed plan. These customers will pay the same amount per unit they use throughout the year. In general, these contracts are already much cheaper than default rates and while you won’t see a drop in price from lower wholesale costs you also won’t be impacted by any price increases. Fixed tariff customers are already winning when it comes to low energy prices.
That said, the majority of UK households are not on a fixed plan for their energy.
Most UK households are on a standard variable or default tariff. Ofgem (the energy regulator) defines these as:
“A basic energy tariff with variable prices that can go up and down with the market. These tariffs are often more expensive than a fixed-term tariff.”
Standard variable tariffs (SVTs) are designed to pass changes in wholesale prices on to the consumer, but despite the market drop suppliers haven’t reduced their costs. As long as they stay below the price cap suppliers are left to choose how they price their energy plans. At the moment, despite the wholesale market being way down, standard tariffs have not followed.
Despite the wholesale savings, if you are on a default plan you are paying 3% more for energy year on year. But what can you do about it?
Suppliers should use their variable tariffs as designed and pass on savings from lower wholesale prices to consumers.
But we cannot rely on the big six to cut their own profit margins. Most customers roll on to standard tariffs unknowingly at the end of a fixed contract. That means standard tariffs are generally reserved for users that aren’t shopping around. Which in turn means that suppliers aren’t driven to compete on price with these tariffs.
Where suppliers do have to compete on price is with their fixed tariffs, because these are used to attract new customers. To ensure you’re always paying a decent price you need to stay on fixed plans and switch regularly.
So, what should you do to make the most of cheap wholesale prices?
If you’re already on a fixed plan you don’t need to do anything yet. Just make sure that when your plan comes to an end you don’t let yourself roll on to the default rates. When you’re free from exit fees shop around and find yourself a new fixed deal.
If you’re on a standard variable tariff, then you need to switch now. Right now, the gap in price between a fixed tariff and your tariff is larger than ever. That’s because where suppliers have to compete on price they are passing that 17% saving from lower wholesale prices to the consumer.
In summary, don’t expect suppliers to do the work for you. You can realise big savings from the drop in wholesale prices but only if you shop around. The average household can save over £200 a year by switching to a fixed plan now.
Use Switchcraft to compare prices and ensure you never roll on to a standard tariff again.
