Some residents have asked whether we’re likely to see substantial price rises for our heat, given the changes of gas prices over the last year.
The short answer is “yes”, but perhaps not as bad as it could be. Most of our heat is from gas, but most of what we pay is not related to the price of gas, but to RPI (retail price index) inflation. Sadly, inflation looks set to be high this year.
Our prices are reviewed annually, on 1 March. That’s good news: otherwise we’d paying more already. But come March, we might be in for a shock. I don’t have a crystal ball, but I do have a spreadsheet. I sent a copy of my calculations to Veolia, who said they would comment if I was making any wildly incorrect assumptions. They haven’t commented, so I presume the following is reasonably accurate. Bear in mind that they also don’t know what the price of gas will be in March, or RPI.
In 2021-2022, we’ve been paying these prices:
Standing Charge: £417.46 per year, though I understand tenants pay a lower price of around £100, but I’m not sure of the exact amount. I don’t know if that’s because Veolia charge less, or because JRHT pay part of the cost as the landlord.
Unit charge: 6.649p per kWh. This is composed of a Fuel Charge, and a permitted “Margin” of 4.53p. Veolia’s price review letter will illustrate charges with a “typical” usage of 6,300 kWh. Coincidentally, this gives an annual fuel cost of £418.89, almost exactly the same as the standing charge. But, of course your usage could be much lower, or much higher than that.
Price changes are adjusted like this:
- RPI inflation: The rate published for November was 7.5%. My guess is that RPI will be between 5% and 10%. Some parts of the cost are linked to inflation.
- Standing charge – this will increate by the RPI inflation rate.
- Unit charges – these are composed of a fuel price and a margin. You may be able to reduce your heat charge by using less heat or hot water. The unit charge is composed of two elements.
- Actual fuel prices. We pay the same that Veolia pay for gas and wood.
- A margin. On top of the fuel charge is a fixed margin, which increases by RPI inflation every year. This is currently the bulk of the unit price that you pay.
Veolia say that their wood chip price hasn’t gone up much: less than inflation. So, I’ve allowed for an increase a bit less than inflation.
However, they buy gas at wholesale prices. Veolia haven’t said how much they’re paying for gas. It’s possible to buy gas well ahead of using it, so the increase may not reflect the prices that you hear in news headlines.
My assumptions for March are as follows:
1. RPI in March will be in the range 5-10%, I modelled 5% in a low scenario, and 10% in high scenario calculations
2. Wood price increase will be moderate, perhaps less than RPI. I modelled 3% in a “low” scenario, and 7% in a “high” scenario.
3. Gas prices will increase two or three fold. I modelled 2x in the low scenario, and 3x in the high scenario.
4. Veolia will continue to target a ratio of 45% wood and 55% gas.
This table shows my calculations for the unit charge. The bottom line shows that the increase might be 20% to 40% – but that depends on the assumptions above. In particular the gas price assumptions, which are the most important, but the most uncertain.
|Pence per kWh||2021-22||Low scenario||High scenario|
|Gas (2x or 3x)||1.14||2.28||3.42|
(3% or 7%)
(gas + wood)
|Margin (RPI increase)||4.53||4.76||4.98|
Fuel + Margin
|% increase in unit price||21.0%||42.1%|
My prediction is that our prices will increase a lot: at least by inflation which could be between 5% and 10%. If you don’t use much heat, then that’s roughly the increase that you’ll see. But if you do use a lot of heat, then the increased fuel cost will be more important, and that could be 20% to 40%, or even more. And the total hit will be somewhere between the two figures, maybe 12% to 25% for a typical user.
I modelled an even worse scenario: with gas prices up by five times, and inflation at 10% and this gave a 75% increase in our heat price, and perhaps 42% total bill increase for a typical user.
Veolia illustrate expected prices with a “typical user” using 6,300 kWh, which we think is about average for a three storey, 3 bed house. Last year, the unit charges added up to about £420: coincidentally about the same as the standing charge, so the total about £840, and I’d imagine that that typical user would see the bill rise by something between £100 in the low scenario, and £200 in the high scenario per year.
My assumptions here could be wrong. Maybe inflation will be higher. Maybe Veolia didn’t get such a good price on gas. On the other hand, inflation could come down below 5% and maybe Veolia have a great price on gas. We’ll find out on March 1.
One more thing: if retail gas prices go up hugely (more than three times), then we might have to add about a penny to our unit charge, due to the “cap and collar” mechanism on our charges. At the moment, we pay a “collar” price, but the Margin on the “cap” price is about a penny higher.
Heating system review
At the request of the Residents’ Association, JRHT have commissioned a review of our district heating system. The aim is to find ways to make the whole system more efficient, so that it becomes more energy efficient. That could make the system cheaper to operate, more climate friendly, and could even reduce your heating bills. Veolia and DRA are cooperating with that review.