Cost of Living: When will bills fall if wholesale costs are dropping?

Put simply what goes up must come down is a principle that gas and electricity prices take little heed of.

For the last two years home energy costs have rocketed to the extent that you could be forgiven for thinking you were paying for actual rocket fuel.

Why?

Well, it was the rising cost of wholesale energy on the international market due to a number of factors.

The cost was rising, and rising very sharply, meaning the price paid by our energy suppliers to those who take it from the ground was going up.

  READ HERE how we reported that bills could go up despite costs falling.

Why those costs were rising is another story altogether and the profits made by the producers were literally eye-watering.

Tears of joy for the bonus-laden chief executives and the shareholders, tears of despair for the end customers footing the bill.

In February 2021 the cost of wholesale electricity was 53p per megawatt hour.

By August 2022 that had increased exponentially to a whopping £5.11 per megawatt hour.

In between in February 2022, it had gone up to £2.13.

Between February 2022 and August 2022, electricity increased by 140%.

For gas, it was a similar story.

In February 2021 it was 48p per therm.

By August 2022 it had massively increased to £5.92 per therm.

In between in February 2022 the price was £1.61 per therm.

An increase of 267% between February 2022 and August 2022.

Since August last year, prices have been falling.

Wholesale gas prices have come down to £1.37 per therm in February this year.

A fall of 77%.

For electricity, it has come down to £1.45 per kilowatt hour.

A fall of 71%.

It seems when the price of wholesale energy goes up, it goes up fast, but when it comes down it does so a lot slower.

It goes up like a rocket and comes down like a parachute.

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By the logic of wholesale prices pushing up bills in 2021 and 2022, they should be coming back down by the same ratio since August.

But not so. Customers have yet to see the impact of the falling price of energy on the international markets.

The Glasgow Times asked the big energy providers to explain if their prices have fallen and by how much.

We were told the reason is a lag in the price the energy companies pay their suppliers for wholesale and it being passed on to the household customer.

Most of the firms ‘hedge’ their energy purchases.

We were told that the price paid by the customer now reflects what they paid between nine to 12 months ago.

So, the lower wholesale price being paid now will be reflected in what customers pay nine months to a year down the line.

So, prices should fall in time for winter.

We asked Scottish Power, Centrica (aka British or Scottish Gas) EDF, E.ON, OVO and Octopus if their tariffs had come down since August, in line with the price they are paying, and if not, why not?

Scottish Power said: “Our standard tariffs have been in place throughout this period and continue to reflect the Energy Price Guarantee.

“Wholesale prices are commercially sensitive.”

EDF said: "Customers have been shielded from the full extent of these cost increases by the Government Energy Price Guarantee at £2500, and it is welcome news that the Government has decided to extend this for an additional three months.

"From October 2022 until March 2023, customers also had additional support of the Government’s Energy Bill Support Scheme, however today, bills are still 2.5 times what they were."

Octopus explained its pricing strategy and how the wholesale price and the energy price cap will have a bearing on when customers see a reduction in their bills.

It said just now gas prices are still four times higher than they normally are at the end of winter, stating: “We’re not out of the woods yet."

Octopus said the price cap means suppliers do not make excessive profits when the cost goes up.

So where is the money going?

It said it is going to the extractors, both UK-based and global, who it said are “earning many times more than usual for the same basic costs”.

On the discrepancy between falling wholesale prices not matching the bills you pay, the energy supplier said it comes down to how it purchases it in advance and applies a “smoothing out” over a period of months to protect customers from short-term spikes.

It said when wholesale costs rocketed bills did not go up by the same percentage.

Equally, when they fall it will not come down at the same rate.

It said when wholesale spikes were “absolutely massive” it didn’t hike the price 10 times higher, adding “that smoothing out works both ways”.

Octopus said: “We can’t automatically put all our prices down [while] wholesale is dipping short term.”

So, if prices continue to drop as expected, then our gas and electric prices should start to fall between now and next winter.

If the price goes back down to what it was before, in 2021, then so should our bills.

What customers, regulator Ofgem and the UK Government, which is responsible for energy policy, must ensure is the energy suppliers are as good as their word and they are not allowed to keep prices higher than they should be.