Challenger gas and electricity supplier Octopus Energy is launching a new variable tariff that directly tracks wholesale energy costs, rather than charging customers an independent standard variable rate.
Customers who sign up to the tariff will also get access to an exclusive app that allows them to view a breakdown of their daily price, showing exactly where their money is going. This breakdown includes the cost of “energy, distribution, environmental & social obligations” and, importantly, the size of the cut Octopus take for themselves – expected to be around 10%. The app tracks spending, prices and monthly forecasts for the user, offering much and more of the functionality off a smart meter, but in the pocket of the customer. However for the time being, much of the usage data will be based on estimates. When smart meters get rolled out nationwide (intended to be by 2020), the data used will be actual and available in real time, making the information that the customer sees all the more accurate.
This introduction of this new kind of tariff is a big move from Octopus for two major reasons – namely, the pricing and the increased transparency, both of which look to change the perception of the variable tariffs for the better.
Standard variable tariffs are the most common target for anyone looking to criticise the energy market and its constituent companies. SVTs are the basic tariffs customers are put on either when they move house or when fixed rate terms end. Typically expensive, SVT rates are subject to change and remain fairly consistently above wholesale energy prices. Ofgem, the CMA and other industry and governmental bodies have repeatedly tried to find ways to get customers off SVTs by incentivising further engagement with the market through switching. Ofgem’s latest estimates put around 20 million of the UK’s energy customers on standard variable tariffs – almost all of whom could save a large amount by switching to a fixed rate deal.
Octopus’ new tracker tariff takes the place of the standard variable tariff but figures as a much better value alternative. Here’s Octopus data scientist David Sykes explaining how the pricing on the new plan works:
The transparency that comes from the app associated with this new plan is important and timely. Every member of the big six bar British Gas has increased their energy prices this year, citing (in part) rising wholesale costs. Each been criticised for not acting similarly (or at least not quickly enough) when wholesale prices have been low. This causes people’s mistrust in energy companies to intensify, and Octopus’ new openness should act as a good antidote to this, helping the industry as a whole and setting a positive precedent.
Jackson said: “The debate over price rises – where the regulator is saying there is no justification for them and the big six are saying there’s no choice – it’s hard for people to know what’s true. This tariff is the first to guarantee that you won’t get ripped off.”
Price rises and overpricing generally have been centre of attention recently as the Conservatives pledged to cap standard variable tariffs should they win the upcoming general election. Octopus founder Greg Jackson has endorsed proposals made by MP John Penrose for a relative cap. Rather than setting a maximum amount a supplier can charge for its energy, a relative price cap would set a maximum price gap between the cheapest and most expensive deals offered by any given supplier. This is typically the difference between a good fixed rate deal, and a standard variable tariff, and can go up to around £250 in some cases.