Rising energy prices
Well we're all fed up with rising energy costs, but have we actually looked at how much the rises cost when they are compounded?
It's like the good old compound interest rates, paying interest on interest. So how does a rising cost equate, exactly? What on earth am I talking about?
Sure enough my energy supplier, whom I've been with all of three weeks and hasn't even started collecting my direct debit, has whacked its prices up again. That is now 3 times in the last 8 months. This rise is 18% for gas and 21% for electricity. If I remember rightly the rise in April was a similar amount, which is why I cancelled a transfer to them back then. Fool I was thinking 2 rises 6 months apart might mean another 6 months before the next one - WRONG!
So, without getting right into the actual prices of my supplier, let's take a hypothetical scenario and price, but base it on npower's rise schedule.
Does a 20% rise followed by a 20% rise followed by a further 20% rise equate to a 60% rise? It does not, no. Remember that "interest on interest" thing when repaying a loan? The same goes here, the rise is based on the current price, not the previous price. So if a price has just gone up 20% twice, then the second rise is 20% of the original price plus 20% of the last rise. With me?
Let's start off in Ocober 2005, when fictitious "npw" energy charge 100p per unit for energy. They whack up the cost by 20%, so you're now paying 120p. That's (120-100=20)p more than you were paying for it in October before the rises. That's 20%, so far so good.
April 1st, and the joke is another 20% rise. But that's 20% of the 120p you're paying now, so the rise is 24p, now you're paying 144p. That's 44p more than in October before the rises, which is 44%. That's a new increase of 20% of the original (20p) plus 20% of the last rise (4p) when you compare to the original cost of 100p rather than the current cost of 120p.
July, and another 20% rise. that's 20% on the current price of 144p, so a 28.8p rise, new cost 172.8p. That's a massive 72.8% more than before the rises in October.
So what am I saying? What I'm saying is this*: To hide bigger rises the energy companies are giving us frequent "smaller" rises. While most people will see three successive 20% rises as 60% the true figure is 72.8%. If they stuck with an annual rise then that 72.8% rise is what they'd have to increase the initial 100p cost by to match three successive 20% rise. And for four 20% rises (which nPower customers are facing within the space of 12 months)? Is that 80%? By now you should be saying "no, it's a whopping 107.36%".
Watch out for companies doing "small" but frequent rises, it may be worse than a single larger rise.
* That so sounds like Tony Blair - apologies!
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