Millions of households have felt the pain of rising energy prices over the past two years as they were switched to expensive variable tariffs at the height of the crisis.
Some providers have quietly started offering cheaper landline contracts again as gas and electricity prices fall, but there’s another, less well-known type of tariff that could also help households save on their bills.
Octopus Energy first launched its tracker tariff in 2017 but withdrew the deal when energy prices rose.
The tariff was re-introduced this summer, but only for existing Octopus customers with smart meters.
Volatile Prices: Octopus Tracker tracks the daily wholesale price of gas and electricity
The tariff records the wholesale price of gas and electricity on a daily basis and invoices customers for this amount.
According to Octopus, it is “the fairest and most transparent tariff on the energy market” as it directly passes on price changes.
Could this be a good way to make savings if the price of wholesale gas falls, or is the risk too great due to the volatility of the market?
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, and typically do, increase or decrease the price customers pay for an SVT as wholesale costs increase or decrease – but ultimately it is at their discretion.
Another difference between an SVT and a tracker is that the price rises and falls at certain intervals and changes do not occur immediately.
Wholesale prices are constantly changing and it is not possible to change SVT rates every day – as customers will see on the Octopus tracker.
Over the last two years, SVTs have remained at or close to the maximum price that can be charged under Ofgem’s price cap rules.
Gareth Kloet, energy expert at GoCompare, says: “In the traditional sense, a standard variable tariff is a bit like a tracker.” In recent years it has been based on the price cap.
“That doesn’t have to be the case, but since energy costs are typically higher than the price cap, that’s what we’ve taken as a guide.”
“What Octopus has done is they’ve deviated from the price cap and offered you a proper tracker – think of it like a tracker mortgage.”
“As a result, the wholesale cost of gas and electricity can rise and fall every day.” Octopus looks at the wholesale price, uses that rate, multiplies it by the amount you use, adds something, and then adds the base charge.
“Your tracker rate will change literally every day.”
Good idea? Octopus’ tracker tariff changes the price customers pay each day as the wholesale market moves – but it is not protected by the Ofgem price cap
How much do you pay for a tracker plan?
Octopus Tracker is not protected by the Ofgem price cap, which is currently 30p/kWh for electricity and 27p/kWh for gas.
Octopus has its own cap on 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.
However, the average basic charge for the tracker is 44.71p/day for electricity and 26.84p/day for gas, below Ofgem’s caps of 53p and 27p per day.
Octopus warns that this “does not apply to everyone and certain customers may be better suited to a rate cap protected plan.”
If the worst happens and gas and electricity prices rise again, you could find yourself stuck
Gareth Kloet, energy expert at GoCompare
Kloet says: “Although the single tariff looks quite competitive at the moment, you could end up paying more if the cost of wholesale gas or electricity increased significantly.” It is not protected by the Ofgem price cap at all.
“Knowing what I know about the volatility of wholesale prices for gas and electricity, I think it offers almost no protection.” The 100p cap is huge and you could end up with a really big bill.
“The only protection this tariff offers is that there is certainty about the base charges at this time.”
Given that wholesale gas and electricity prices have fallen in recent months, some households may think it’s worth tracking wholesale energy prices on a daily basis.
“If you think it will continue to go down, you could get a good deal,” says Kloet. “But we are approaching winter, and as Octopus says, the cost of gas and electricity usually gets more expensive in the colder months because we all use more.”
In addition to the volatility of the energy market, customers also need to keep an eye on daily market movements.
Wholesale electricity and gas prices can fluctuate from day to day. Source: energy-stats.uk
Kloet says: “I had to get a spreadsheet to do the calculations.” This is difficult because you have to calculate the wholesale prices for gas or electricity and they are very different.
“Energy is a necessity. You can’t really control what you consume on a daily basis unless you start doing radical things like turning off the heat or stopping cooking.”
“I think these maximum prices are so high that in the worst case scenario you can get stuck and the prices for gas and electricity go up again.”
If prices go up this winter, it’s worth noting that you can notify Octopus two weeks in advance to switch from Tracker to a different plan.
However, if you want to switch back to the tracker at a later date, you will need to wait at least 9 months before doing so.
Kloet adds: “You may be able to leave with notice, but how many of us regularly check the wholesale price you have been charged?”
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.
However, if you are willing to track the price daily and take remedial action when the price is high, this could be a good option.
Rebecca Dibb-Simkin, chief product officer at Octopus Energy, said: “Our customers are truly engaged participants in the energy system – and tariffs like these allow them to play an even more active role while making some savings.”
“For people who can shift their energy-intensive tasks to days when the price is lower, [the tracker tariff] can be enormously useful.’
Octopus did not disclose how many of its customers use its tracker plan.
Kloet believes that in reality there will be relatively few: “You have to study energy to keep an eye on the wholesale costs of gas and electricity, to follow the markets on a daily basis and to find out whether you are in a better or better place condition.” is a worse offer and I think it’s just not for the general public.
“I think they’re just too complicated. With your mortgage, interest rates change from month to month, while interest rates change daily, which is exceptional as it can be volatile.”
However, this volatility could be beneficial for households with higher energy consumption.
Nathalie Mathie, energy expert at Uswitch.com, says: “With tracker tariffs, it’s often just the flat price that fluctuates, so households with higher consumption may benefit when prices fall.”
“In return, you could potentially benefit from greater savings in the long run, but you may want to be prepared to switch to another offer if prices skyrocket.”
The problem is that wholesale prices could be elevated for some time.
Energy experts at Cornwall Insight expect Ofgem’s price cap for the average household to rise by £64 at the next review.
Although this does not protect Octopus’ tracker, it suggests that wholesale prices will rise again. In general, wholesale prices tend to rise in the first three months of the year.
Mathie adds: “Fixed tariffs are the only type that gives you certainty about what you will pay for a specific period, usually 12 months.”
“During this period, the cost of SVTs will change four times, while the price of a tracker could change daily.”
This volatility could also be an indication of why other providers have been slow to offer their own tracker plans, although that could change in the coming months.
If you’re considering Octopus Tracker, note that it’s still in beta and there’s no set date for its official launch.
However, eligible customers – existing customers with smart meters – can register now.
Some links in this article may be affiliate links. If you click, we may receive a small commission. This helps us finance This Is Money and keep it free to use. We don’t write articles to promote products. We will not allow a commercial relationship to compromise our editorial independence.