Don't believe the hype about energy prices

The disappearance of OVO Energy's cheaper tariff is absolutely by no means indicative price rises to come.

There's no question that over time energy prices will rise. Aside from inflation, the regulator, OFGEM, accepts that a great deal more investment is needed on infrastracture in particular, but also on green technologies. Naturally, energy companies will also try to put up prices whenever they can get away with it to increase their profits.

However, over shorter periods of a year or two, prices can go either way. This makes the decision to fix somewhat harder.

Everyone's saying prices are going up

What's more, the media makes it seem like predicting energy prices is bleeding obvious, which doesn't help. Commentators everywhere have noted that newcomer OVO Energy, which was for a few months the cheapest supplier in many regions, has just put up its prices for new customers by 8%. This, commentators are all saying, is a warning sign of imminent price rises across the board.

I'm feeling déjà vu. For the past two years, I've been showing readers why the standard energy guidance given by finance and energy commentators on when we should switch suppliers is incorrect, because it is based on just one piece of information in isolation.

Now we've got a similar situation where commentators are assuming that a price increase from OVO Energy means an increase in everyone else's prices.

Let's get this straight – it's not a price rise

I talked with OVO Energy founder Stephen Fitzpatrick, who explained that it has not put its prices up. What happened is, this spring OVO found some energy at attractive prices on the wholesale markets and bought it, allowing the supplier to sell a fixed amount of cheaper energy to a limited number of customers.

The deal, offering cheaper, fixed prices for 12 months, was bought up in four weeks, twice as fast as OVO expected. Now that the energy has been allocated to customers, OVO has removed the tariff for new customers, which means its cheapest tariff is now the same price as four weeks earlier.

Hence, the apparent rise in OVO's prices does not mean that prices are going to go up across the market.

A supplier's price changes can be a sign of the future

It's true that watching the evolution of British Gas' prices has sometimes been indicative of what the other so-called Big Six players will do.

At the same time, we must remember that British Gas has 16 million accounts. Ovo Energy, on the other hand, has 30,000 customers. Not bad for such a short time in business, but no comparison to BG. According to a report, Darren Braham, CFO at another small supplier, First Utility, said that the small suppliers have just 0.1% of customers altogether. (That might have been an understatement, but by my estimates using other data it's probably not much of one.)

Hence, the effect of small suppliers' prices on the pricing policies of the big six has been massively overstated by the mainstream media.

Behind the scenes

Just as the pricing policies of the big and small suppliers is different, so it is different when the suppliers come to buy wholesale electricity. For several years there has been a to-ing and fro-ing between the BERR, OFGEM and some small suppliers on the one hand, and the big six on the other, regarding problems in the wholesale market.

The former group is saying that small suppliers have significant difficulties when buying wholesale electricity. They have less flexibility, fewer options and more trouble creating a buying policy that gives them the energy they need at fair prices, without exposing them to too much risk. Welsh Power told the BERR: "Quite simply we cannot buy what we need to buy to deliver the power for our customers when we need to".

Naturally, the big six are working extremely hard to counter those claims, but the evidence is against them.

OVO is different

Stephen Fitzpatrick claims that so far he hasn't had the same problems as those small suppliers who've been complaining. His business is more agile, he says, which could explain why OVO was able to nip in to the wholesale market to buy some particularly cheap energy.

Whichever way that you look at it, it's clear that the price moves of small suppliers is hardly indicative of changes in the bigger market.

So should we fix our energy prices?

Using OVO's recent tariff changes as your grounds to fix now doesn't make sense. The usual (and admittedly boring) reason to fix is if you would struggle if prices were to rise quickly and that remains the main reason, with the other reason being to take good fixed deals when they arise. I shall surely keep you updated on any agile moves from OVO that result in cheaper fixes.

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That said, there have been some good fixed tariff deals around of late, and still are. Some of you can currently fix for the same price as a variable tariff.

If you're thinking of fixing, you might like to get a move on. I estimate that close to one million people have come off some great tariffs recently. Lots of these customers, who clearly shop around, are probably going to want a piece of the existing fixed deals and, if lots of people go for fixes, those deals are going to quickly disappear for new customers and probably be replaced by more expensive ones.

Do also consider your exit costs before switching, as well as the exit charges for your new tariff. Read Avoid these massive hidden energy charges for more guidance on that, as it's not always straightforward exit penalties you need to look for.

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