An interesting letter that was recently circulated by Octopus to its customers:

This Friday, Ofgem will announce the official level for October's energy price cap. It will be a further huge rise on already high prices.

Your tariff isn't changing right now. Today, I'm writing to you to share what I know, including notes on Government support and everything we're doing to help you prepare for it as best we can. For more on how the cap works, and which tariffs are affected, check our blog.

Make no mistake, this is a fossil fuel crisis. As a direct result of Putin's invasion of Ukraine, global gas prices are astronomical — currently around eight times higher than usual. And because of the way the UK's energy system works, the price of electricity (even renewable electricity) is largely set by the price of gas. I've spoken more about this here. This needs to change — a review is underway, but it won't change things quickly enough to address the crisis.

Gas prices have been like this for almost a year now, but as the energy price cap is based on past wholesale costs, the worst of these rises have not yet passed on to customers.

It is October when this impact will truly hit bills.

Our team help around 30,000 customers a day and we know what this will mean. There is some government support, especially for those who need it most, but a lot more is needed.

We have spent the last year working with other companies and experts to bring ideas to the regulator and government which we hope they will implement. But time is running out and until we hear what the government might do, we want to help our customers prepare. We've recently updated our online Balance Forecast tool with “Crystal Ball mode”. This shows customers on our Flexible Octopus tariff the impact of likely price changes and factors in the government rebates already announced. While it can't be fully accurate, it should hopefully provide some perspective.

To date, Octopus have absorbed over £150m of increases, to keep our costs lower for existing customers, but we simply can't absorb it all. Putting it in perspective — in a normal year, we'd usually pay £1.5bn for the fuel we supply to customers. This year it's more like £9bn. There's more about this below — but to be clear, we have never made a profit and won't do this year.

No energy supplier can solve this problem — this isn't an industry issue, it's a consequence of war. This is why we've been calling on government help for all customers, regardless of who their supplier is.

October's Price Cap in context and Government support currently available

• We don't yet know what the October price cap will be, but it's likely to be around £3,500 for a typical home. This is 80% higher than the same time last year and well over twice what it was last winter.
• In May the government announced £400 support per household, which will reduce the impact of the October rise to about 50% more than current prices. This will take the form of an automatic monthly credit of £66 or £67 between October and March for all electricity customers, and where appropriate, an automatic reduction in your monthly payments. You don't need to apply for this and we will pass it on automatically — we'll also provide a way for anyone who wants to donate their credits to those who need it more to do so.
• Many low-income households received £326 directly to their bank accounts (usually marked "DWP Cost of Living") in July, with a second payment of £324 due in the autumn.
• Those on tax credits will also receive £650, but have to wait until autumn for their first payment of £326, followed by a second payment in winter
• Anyone receiving disability benefits will automatically receive £150 in September — this will be in addition to the £650 payment where relevant.
• Those on a pension will receive an additional £300 winter fuel payment

We speak to 140,000 customers each week — more than we ever have — and know first hand the stress and worry this is already causing, and how many people face genuine difficulties in paying this winter.

We'll keep doing everything we can to help. We've increased our Octopus Assist fund from £5m to £7m and are helping those who need it most in a number of ways including:

• Direct financial assistance
• Payment plans
• Free electric blankets over Winter (using electric blankets to stay snug on your sofa can save £400 on your energy bill).
• Loaning thermal cameras to spot heat loss around the home

To help everyone find simple ways to save by using less energy:

• Our Winter Workout is coming back in 2022. This gas-saving initiative helped hundreds of thousands of customers cut their gas bills by 12% on average last Winter — collectively, their energy savings would reduce bills by about £10m over just 12 weeks.
• Smart energy savings are on the way, where you could be paid to use less electricity at certain times. We'll share more detail about these soon. If you're interested, you'll need a smart meter — join the list to get one here.
• Our simple energy saving tips could help a typical household save £400

If you do one thing, please, please check your boiler flow temperature (tip number 1). It's easier than it sounds — takes less than a minute — and could save you hundreds of pounds without affecting your comfort at all. It helped our customer Abigail cut her gas use by 16%.

But it's clear, given the scale of the problem, that only the government can provide sufficient help to make a big enough difference. In effect, Putin has weaponised energy — and it's right that the government helps with this. We do expect more support and will continue to put ideas to the government. For some of our thoughts, read the questions at the end of this email.

Unless the government intervenes, here's the expected events for the coming weeks:

• Aug 26th: Ofgem announces cap level
• Sep 6th: New Prime Minister takes office
• Sep 13th: Octopus starts sending personalised messages with your tariff and estimated details (this will take several days)
• Sep 17th: Octopus starts updating direct debit (these will be delivered to those affected over time, based on account status and usually you can adjust them if you think we are wrong)
• September 30th - October 6th: You can send us a meter reading at any time — if you'd like to submit one for the changing prices you can do that right up until October 6th. Online is best — you can do it online in seconds.
• October 1st: New price cap comes into effect

If you are having difficulty paying, head to this page to find out about the support available and how to access it. You're always welcome to contact us, but we will be busy — very busy. We don't use error-prone “voice recognition”, endless “push button menu” systems or frustrating chatbots. Whether you email or call, you'll deal with real people who're here to help and experiencing the same difficulties as everyone else.

During these times our team will be stretched — even though we've recruited and trained many new team members — so remember you can update your payments, see your bills, take a look at your balance forecast, or move house all from your online account, and doing so will free up our team to help those who need it most.

This is not the sort of email anyone welcomes, but I hope it is helpful. Thank you for your time — if you have a moment, I'd appreciate your thoughts on this email and the crisis — this simplest way is via this very quick survey.

Finally, a word about our team. It's not easy being on either end of calls at the moment, and I'd like to say thank you to the vast, vast majority of customers who have been so thoughtful and have shown such understanding to our team during these times. It makes a huge difference and lets us employ people who really care — thank you.

With regret and determination,
Greg Jackson
Founder, Octopus Energy

What's caused this?
After the lockdowns around the world, global supply chains suffered from shortages, pushing prices up. But Putin's invasion of Ukraine sent gas prices skyrocketing to unprecedented levels and they've only got worse.

Where's the money going?
Put simply, oil and gas extractors. Whilst the cost of extracting gas hasn't increased, the global shortages have increased prices from 60p/therm to £4.80/ therm. To put it in perspective - the UK usually spends £11bn buying the gas to deliver to homes, and to generate electricity for them. This year that's more like £51bn.

Why is renewable electricity more expensive?
The UK has a single wholesale price for electricity — whether renewable or not. Indeed, renewable electricity costs more because we need to pay for certificates on top of the wholesale price. This is bonkers and we have frequently called for reform. This may happen but not in time for this year.

Is Octopus making a profit on this?
No. We've never made a profit, nor paid our shareholders a dividend, and won't do this year. Instead, we have put everything into helping customers.

For perspective, we'd usually pay £1.5b to buy all our customers' energy for a year. This year it'll be more like £9b.

What could the government do?
We were pleased when the government announced its existing support package in May, but since then prices have escalated and that means the package is hundreds of pounds less effective than it was originally intended to be. And with January prices likely to be dramatically higher still, it's clear that the existing support package is not enough.

Whilst there are many ideas, Octopus agrees with other energy companies that the best plan is to freeze the price around the existing cap level. This would be paid for by an industry-wide fund. We'll blog details shortly, but in short — while wholesale prices are higher, companies use the fund to deliver the price freeze and when wholesale prices drop, companies pay back into the fund. This would see prices at current levels for 2-4 years, and then fall over the next decade - especially as cheap renewables come online and market reform passes the savings to customers. Crucially, it would also reduce inflation by about 3.5%, helping reduce other costs across the economy.

Surely the government can't support energy bills forever?
Absolutely right. The markets expect global gas prices to come back down in two-ish years, or sooner if the war in Ukraine resolves. This is because right now, gas storage is being increased and supply chains are being built and re-routed globally so that the UK and Europe get more reliable and resilient access to gas.

At the same time, renewable projects are being accelerated in the UK and across Europe, and electricity markets will be reformed to help bring electricity prices down via cheaper renewables. The long-term thinking in the plans we propose helps absorb the volatile and high market prices in the short term and then bring prices down as gas and electricity markets improve. We don't need magic money, we need shock absorbers and market reform.

Are prices going up more in the UK than in Europe?
Wholesale prices are very similar across Europe but government response varies by country.

This very clear Reuters article is a good summary of the differences in government actions by country.

Is there hope?
Yes. The price freeze proposal would stabilise prices whilst we get long-term solutions in place. And then prices will drift down to not much more than half current levels over the next decade. We will continue to work extremely hard with the rest of the industry, government and other organisation to try to make this - or alternative solutions - a reality.

@chickenbig, that's very interesting. Not surprised to see coal coming back. Worrying times ahead.

@chickenbig coal has pretty much been 24/7 for many weeks now. It shows how desperate we are that in middle of Summer, coal is needed, even at off peak times.

How is it everytime the press announces something, Putin within hours does the opposite to give a Net Gain of Zero. The media's reporting of events will lead to people dying and wrote to Ben Wallace - my MP who chose to ignore.

Examples:

- ) Big announcement few weeks ago that National Grid was bringing extra gas from Norway to pump into Holland, and then to EU storage- Putin's response - further shut down NORD STREAM1 to 20% flow.

-) Announced on BBC that UK and EU are so desperate for gas that a Supertanker of LNG from Australia is in transit to the UK, then repeat that as the UK has no storage that we let pretty much all pass through to EU to store to give us back in Winter. Putin's response, shut NORD STREAM1 off completely for 3 days - coincidentally, about the same amount of gas that ison that ship over the 3 days.

Putin is not stupid and we need to stop disclosure of the game plan. In the 30's it was treason!!

This hit BBC last yesterday:

BBC News - Energy crisis: UK expands gas emergency exercise ahead of winter
https://www.bbc.co.uk/news/uk-politics-62604653

I keep telling people, soon be yelling at people to get in place alternative forms of heat ,whether wood burner, gas fire as long as it does not rely on Mains Gas or Electricity.

https://www.gov.uk/government/publications/electricity-supply-emergency-code

Putin wants to freeze the EU into submission and as collective punishment for supporting Ukraine. And believe me, what Putin wants, he gets. He has no care if people freeze this winter.

This country also relies in Interconnected power from the EU as well as piped gas and Internet- what if by some fluke, one of these were damaged?

Our World beating "robust and diverse energy system" will collapse in minutes. Norway is low on rainfall, they won't be sending much Electricity this Winter. France say they will struggle to export due to demand thus year. So this robust Energy system they keep telling us about, is heavily reliant on other countries.

Yet, they still keep pushing Heat Pumps. For once in my life, I am so glad to have a Gas Boiler which is soon to be converted to LPG and taken off Grid.

Gas generation is the crux, never falls below 40% on a breezy, sunny summer day. Up to 75% at night and the depths of winter. So when demand for electricity is higher, the higher proportion is from Gas.

Look back at historical Winter graphs and remove Gas, it doesn't cut it.

@chickenbig

OCGT is not Oil, it stands for Open Cycle Gas Turbine. It is when the Gas Turbine is running and driving its generator, but the exhaust gases are not producing enough steam via the Heat Recovery Steam Generator (HRSG) to drive the Steam Turbine and power its generator.

In Open Cycle a CCGT is approximately 33% efficient, which rises to approximately 50% when running in Closed Cycle.

@derek-m

Aaah, OK. I was misled by one website which lumped oil and OCGT into one category. I guess the OCGT could still be running on natural gas, if it was a CHP installation. Or else on diesel.

@chickenbig

Open cycle are often called peaking plants as they’re only really used to satisfy peak demand for short periods of time as opposed to base load generation.

@mattengineer

Yes, now that I have found this site I can see the OCGT was producing 0.25GW between about 1530 and 2100 yesterday.

@editor

Doing a bit of further digging, there is quite a difference between wholesale gas prices (and so the cost to run a CCGT) and day-ahead electricity prices. Of course my numbers are off by a bit (e.g. cost of getting the gas from the national balancing point to the power station), but £4/therm implies 30p/kWh cost of production as opposed to 60p/kWh peak prices. I wonder where that difference comes from; I presume other costs (capital, maintenance) have not greatly increased in one year when average prices were 10p/kWh.

@chickenbig

When a Combined Cycle Gas Turbine (CCGT) is first started it is in Open Cycle. The exhaust gasses from the Gas Turbine can be used to heat the water in the HRSG which eventually produces sufficient steam to start the Steam Turbine and run its generator. It that way you get two bites at the cherry.

If you look at the National Grid data most of the time generation is only Closed Cycle and occasionally Open Cycle when an additional CCGT is being brought online.

@chickenbig

A CCGT can be run in either Open Cycle or Closed Cycle, but since Closed Cycle is more efficient then that is the preferred method. When a CCGT is used for peak lopping it invariably operates in Open Cycle because it has not been running long enough to generate sufficient steam to run the Steam Turbine. Obviously in Open Cycle the electricity produced is more expensive.

@chickenbig

There are many factors that affect the cost of running a CCGT Power Station, although the cost of fuel is obviously the largest expense.

Quite a few years ago when I was working at a CCGT, the annual connection fee charged by National Grid was £6 million. Then you have staffing costs, loan repayment etc. etc. It all adds up.

And now, a further week on, EDF are not quoting any fixed rate price, only the standard variable one.

Mike