Octopus tracker tariff: As energy prices fall, could it cut your bills?

Millions of households have felt the pain of rising energy prices over the past two years, as they were moved onto expensive variable tariffs at the peak of the crisis.

Some suppliers have quietly started to offer cheaper fixed deals again as the price of gas and electricity falls, but there’s another type of tariff that isn’t as widely known that could also help households save on their bills. 

Octopus Energy first launched its tracker tariff in 2017, before pulling the deal as energy prices rose. 

It then relaunched a the tariff this summer, but only for existing Octopus customers with smart meters. 

The tariff tracks the wholesale price of gas and electricity daily, and charges customers that amount. 

Octopus says is ‘the fairest and most transparent tariff on the energy market’ as it passes price changes on directly.

As the price of wholesale gas falls, could this be a good way to make some savings or does the volatility of the market make it too much of a risk?

What is the difference between standard variable and tracker tariffs?

Standard variable tariffs also depend to some extent on the wholesale price of gas and electricity. 

Suppliers can increase or decrease what customers pay on an SVT when wholesale costs go up, or down, and usually do – but it is ultimately at their discretion. 

Another difference between an SVT and a tracker is that the price will go up and down at certain intervals, and changes won’t happen immediately. 

Wholesale prices move all the time, and it’s not feasible SVT tariffs to be changed every single day – as customers will see on the Octopus tracker. 

For the last two years, SVTs have remained at or around maximum price that can be charged under Ofgem’s price cap rules. 

Gareth Kloet, energy expert at GoCompare says: ‘In a traditional sense, a standard variable tariff is a bit like a tracker. For the last couple of years, it’s been tracking against the price cap. 

‘It doesn’t have to but because the cost of energy is typically higher than the price cap, it has been tracking against it.

‘What Octopus has done is they’ve departed from the price cap and they’re offering you a proper tracker – think of it like a tracker mortgage.

‘So the wholesale cost of gas and electricity can go up and down every single day. Octopus will look at the wholesale price, use that rate, times it by however much you use, add a little bit on and add on the standing charge.

‘Their tracker tariff will literally change every single day.’

How much will you pay on a tracker tariff?

Octopus Tracker is not protected by the Ofgem price cap, which is currently at 30p/kWh for electricity and 27p/kWh for gas.

Octopus has its own cap for the tracker, but this is significantly higher than Ofgem’s. 

The maximum daily price for the tracker tariff is 100p/kWH for electricity and 30p/kWh for gas.

The average standing charge for the tracker is 44.71p/day for electricity and 26.84p/day for gas, however – below Ofgem’s cap of 53p and 27p per day. 

Octopus warns that it ‘is not right everyone, and certain customers may be better suited to a price cap protected tariff.’

Kloet says: ‘Although at the moment the unit rate looks quite competitive, if the cost of wholesale gas or electricity went up significantly, you could end up paying more. It’s not at all protected by the Ofgem price cap.

‘Knowing what I know about the volatility of wholesale gas and electricity prices, I think it offers almost no protection. That 100p cap is huge and you could really end up with a large bill.

‘The only protection this tariff is offering is that there’s certainty on the standing charges at this moment of time.’

Given the price of wholesale gas and electricity has fallen in recent months, some households might think it is worth tracking the price of wholesale energy daily.

‘If you believe it’s going to continue going down then you might get onto a good deal,’ says Kloet. ‘But we’re approaching winter, and as Octopus says, the cost of gas and electricity typically gets more expensive in the colder months because we’re all using more.’

Alongside the volatility of the energy market, customers will need to be very aware of the daily movements of the market.

Kloet says: ‘I’ve had to get a spreadsheet to make calculations. It’s hard because you have to make a calculation about what the wholesale cost of gas or electric is and that varies a lot.

‘Energy is a necessity, you can’t really control what you use on a daily basis unless you start doing radical things like turning off the heating or stopping cooking.

‘I think those maximum prices are so high, that if the worst happens and the price of gas and electricity goes up again, you can get stuck.

If prices do rise this winter, it is worth noting that you can give Octopus a fortnight’s notice to move off the tracker and onto another tariff. 

If you want to switch back to the tracker at a later date, though, you’ll need to wait at least 9 months before doing so.

Kloet adds: ‘Although you can leave with notice, how many of us check the wholesale price that you’ve been charged on a regular basis?’

Who should consider a tracker energy tariff?

A tracker tariff is certainly not for everyone. If you’re already struggling to keep up with your energy payments on an SVT, then a tracker tariff is certainly not for you.

If you’re willing to track the price daily and make workarounds when the price is high, though, it might be a good option.

Rebecca Dibb-Simkin, chief product officer at Octopus Energy says: ‘Our customers are really engaged participants in the energy system – and tariffs like these enable them to play an even more active role while making some savings too.’

‘For people that can shift their energy-intensive chores to days when the price is lower, [the tracker tariff] can be hugely beneficial.’ 

Octopus did not disclose how many of its customers are on its tracker tariff.

Kloet thinks that in reality, there will be relatively few: ‘You’ve got to be into energy to be tracking the wholesale cost of gas and electricity, following the markets on a daily basis and working out whether you’re on a better or worse deal and I think that’s just not for the general public.

‘I think they’re just too complicated. With your mortgage, interest rates will change on a month by month basis whereas this is changing on a daily basis which is extraordinary because it can be volatile.’

This volatility might have its benefits for households that use more energy, however. 

Nathalie Mathie, energy expert at Uswitch.com says: ‘With tracker tariffs, it’s often only the unit rate that fluctuates so higher-usage households might stand to gain if prices drop.

‘In return, you could potentially benefit from bigger savings over the long term, but you may want to be prepared to move to a different deal if prices start to soar.’

The problem with this is that wholesale prices could be elevated for some time. 

Energy experts Cornwall Insight predict that Ofgem’s price cap will rise by £64 for an average household the next time it is reviewed. 

While Octopus’ Tracker is not protected by this, it suggests that wholesale prices are set to rise again. Generally, wholesale prices tend to rise in the first three of the months of the year.

Mathie adds: ‘Fixed tariffs are the only type that will give you certainty over what you will pay for a set period of time, usually 12 months.

‘During that time, the cost of SVTs will change four times, while the price of a tracker could change every day.’

This volatility might also suggest why other suppliers have been slow to offer their own tracker tariffs, although that might change in the coming months.

If you’re considering Octopus Tracker, be aware that it is still in beta phase and there is no set date for its official launch. 

However, eligible customers – existing customers with smart meters – can sign up now.

Content source – www.soundhealthandlastingwealth.com