How the Wholesale Energy Market Affects Your Bill
If you rent or own a property in the UK, you’ll have heard about the rise in wholesale energy prices. Accounting for up to 40% of your overall bill, wholesale costs are a key issue and if you’re looking to save money, it helps to understand how it all works.
In this complete guide, we explain what wholesale energy prices are covering how the wholesale market works and how it affects your bill. We’ll also give an account of current market conditions and wholesale prices per kWh.
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What is wholesale energy?
Wholesale energy is electricity or gas that is purchased in bulk to resell for profit. Energy suppliers buy wholesale energy from energy producers. They will then add charges to cover the cost of distributing energy to you.
Other parties that purchase energy wholesale include:
- - Financial intermediaries
- - Energy traders
- - Large energy consumers (such as multi-national corporations)
How does the wholesale energy market work?
The wholesale energy market allows suppliers to buy and sell large quantities of energy to and from one another. In today’s market, smaller independent energy producers are also able to take part. This is stimulating the growth of new energy companies.
Since energy markets deregulated, end-users have benefited from:
- - More reliable service
- - More efficient transmission of energy
- - Better price transparency from suppliers
Why are gas prices rising in 2022?
Changes in the wholesale energy market can impact your bills. In the case of global issues such as the war in Ukraine and fossil fuel shortages, costs inevitably go up. Energy suppliers buy energy in advance and tack on charges such as distribution; when wholesale energy prices go up, they have to factor in these costs.
The energy price cap, set by the regulatory body Ofgem, limits the amount that suppliers can charge for their energy. However, Ofgem is forced to raise this in times of crisis so that suppliers can continue to operate. The price cap is calculated every few months and wholesale prices per kWh change as it does.
Any changes will depend on the type of energy tariff you’re on. Fixed-rate tariffs will not be affected by wholesale changes as your unit rate will be locked in for the duration of your contract. Variable tariffs will change as the market does.
Wholesale energy prices make up almost half of your bill. Here, you can find a breakdown of your energy bill is calculated.
Here's how your wholesale energy bill breaks down:
- - Distribution (16%)
- - Tax (24%)
- - Operating costs (11%)
- - Profits (7%)
What affects wholesale energy prices?
Like any product, energy is subject to changes in supply and demand. Suppliers buy much of the energy we use in advance. Energy bought in advance is often sold at different prices. This is known as hedging.
Hedging allows energy companies to reduce changes in the price of gas and electricity. The practice protects you from big jumps in your energy bills. But what causes these changes in wholesale energy prices? Below are some of the main factors that drive prices up and down.
Gas supply
At one time, the UK generated all its own gas needs, but the North Sea reserves have diminished in recent years. To keep an adequate gas supply, the UK now imports large amounts of natural gas. As a result, it must pay as much as EU countries to secure gas through European pipelines.
Relying on the EU means the UK is exposed to European gas shortages. When pipelines or gas fields in Europe go offline, wholesale energy prices across the continent spike.
Sustainability of the energy source
For the first time in 2019, renewable energy provided power to more properties than fossil fuel energy sources. This trend looks likely to continue given the government’s commitments to seeking a low-carbon economy.
Renewable energy is sustainable. Many hope it will stabilise energy markets as well as be better for the environment. However, for now, wholesale energy prices are still often based on the availability of fossil fuels.
Changes in currency value
Wholesale energy prices are also influenced by the Pound’s strength against the Euro. When the Pound is stronger, gas and electricity prices fall. When the Euro is stronger, the prices the UK pays will increase.
Temperature
A lot of energy is used for heating. So, when temperatures are higher, demand goes down. This reduces the cost of wholesale energy. These prices are often linked to forecasts as wholesale energy is bought in advance.
Carbon tax
Energy providers have been pushed to meet carbon emissions targets. Charges are applied to companies based on the amount of carbon dioxide they use. Energy suppliers that fall behind carbon targets will need to pay a higher price. These increases can harm the broader market by encouraging increases in selling prices.
Global Events
Wholesale energy prices are often affected by global events. Conflicts or natural disasters in countries that produce gas or oil can have a big impact. UK markets are vulnerable to these changes because they are so reliant on imports.
Does the wholesale market affect renewable sources?
When markets change significantly it usually places stress on other parts of the industry.
With a higher demand for gas and electricity, the wholesale cost of renewable energy will also increase. The closer the UK moves towards low-carbon heating and starts to generate electricity, the less reliant we are on the wholesale market and the less vulnerable to price changes.
What are wholesale prices per kWh in 2022?
According to the latest figures released by Ofgem, the new energy price cap announced for October 2022 for the rest of the year will see typical usage rise to £3,549 for both gas and electricity.
Here’s how the prices per kWh break down:
|
Fuel |
Price per kWh April - September 2022 |
Price per kWh October - December 2022 |
|---|---|---|
|
Electricity |
£0.28p per kWh Daily standing charge: £0.45p |
£0.52p per kWh Daily standing charge: £0.28p |
|
Gas |
£0.07p per kWh Daily standing charge: £0.27p |
£0.15p per kWh Daily standing charge: £0.28p |
Energy suppliers cannot charge you more than the amounts displayed in the table. However, many people confuse this with a monthly energy price cap. The price you pay each month for your gas and electricity can go up and down based on the amount of fuel you use.
For business energy customers, there is no price cap, so the only way to protect your energy bills is to compare and switch suppliers for your business gas and business electricity.
Should you switch energy suppliers?
Even if you’re not directly affected by wholesale costs, it’s always worth comparing energy prices. Some energy suppliers make better strategic purchases than others. That can trickle down to allow suppliers to offer more competitive pricing.
If you’re on a variable rate tariff, you should monitor your unit rates. If your prices increase, you may be able to switch to a cheaper deal.
To find out how much you could save, compare the latest energy prices here.
