Ofgem has found that a cost-passthrough tariff exposing consumers directly to wholesale energy prices would have cut the typical dual fuel bill for a customer on a standard variable tariff by £62 – or 5.8 per cent – in recent years.
The regulator reached the figure by analysing cost data for the period of January 2013 to March 2018.
In a new report, it said the majority of the savings – £33 per year – would have come from lower wholesale costs due to the avoidance of hedging actions.
Meanwhile, operating costs would have been around £16 per year lower. Ofgem said the potential future savings could be even greater, as some costs – for example, employing and managing a trading team – could be avoided by a supplier offering a cost-passthrough tariff.
Consumers would have saved another £28 per year if suppliers generated earnings before interest and tax of 1.9 per cent – the profit margin which the Competition and Markets Authority deemed to be fair in its energy market investigation. And Ofgem said they would have also saved £3 per year from lower VAT.
These savings would have been offset somewhat by a £10 per year increase network costs and a £9 per year increase in policy costs.
The regulator also found that “affluent” households would benefit most, at least when it comes to power. They could be expected to save £18 per year on their electricity bills, compared to £10 per year for “comfortable” households and £7 per year for those facing “adversity”.
Ofgem said linking retail prices to wholesale costs could deliver significant benefits in terms of reducing peak demand. But it said consumers who are unable to respond to the price signals would face “surge pricing” and that those who are risk averse, most likely from low-income households, may view the risks as outweighing the potential savings.
In March 2018, Octopus Energy became the first supplier in Great Britain to launch a half-hourly time-of-use tariff for households reflecting prices on the wholesale market.
The following October, the company revealed the tariff was having “significant impact” on customer behaviour, particularly among electric vehicle (EV) drivers.
It said 95 per cent of customers had paid the same or less than they would on the supplier’s cheapest fixed price deal and that the typical household could be expected to save £45 on their annual bill.
Octopus Energy has since launched a half-hourly time-of-use tariff designed specifically for EV drivers.