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The definitive guide to wholesale energy: How it works, prices and more

If you're searching for the best energy deals, it can be helpful to understand the wholesale energy market. The energy market can be a complicated business. But knowing how it works can help you save money.

In this guide, we explain what the wholesale energy prices are. We'll also cover how the wholesale market works and how it affects your bill.

Contents

What are the wholesale energy prices in 2021?

The current wholesale electricity prices are 3 pence per kWh. Gas wholesale prices are currently 0.45 pence per kWh. Wholesale gas and electricity have fallen quite significantly since 2018. Here’s how the UK’s wholesale electricity price has changed over the past two years.

Source: https://www.ofgem.gov.uk/data-portal/wholesale-market-indicators

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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:

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

How does the wholesale market affect my energy prices?

Changes in the wholesale energy market can impact your bills. Any changes will depend on the type of energy tariff you’re on. Changes in wholesale prices can affect variable rate tariffs. Your prices may rise if the market becomes less competitive.

Fixed rate tariffs will not be affected by wholesale changes. Your unit rate will be locked in for the duration of your contract. Wholesale energy prices make up almost half of your bill. Here, you can find a breakdown of your energy bill is calculated.

Wholesale price (42%)

Just under half of your electricity bill covers the wholesale price of energy.

Distribution (16%)

Retailers add a charge to your bill to cover the cost of getting energy to your property.

Taxes (24%)

Electricity is taxed highly if it’s not from a sustainable source. Taxes can add up to almost a quarter of your bill.

Operating costs (11%)

This part of your bill goes towards paying your suppliers operating costs. They include salaries, research, and technology.

Profits (7%)

The last part of your bill makes up the profit that a supplier will make on selling you an energy tariff.

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 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, gas prices for 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 source. 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 being better for the environment.

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 price.

Global Events

The wholesale energy market is often affected by global events. For example, the COVID-19 pandemic has reduced global wholesale prices. Conflicts or natural disasters in countries which produce gas or oil can increase wholesale energy prices around the world. UK markets are vulnerable to these changes because they are so reliant on imports.

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.

With Love Energy Savings, you can quickly compare a wide range of energy suppliers. All we ask for is your address and a few contact details. You can then compare the best energy deals online. To find out how much you could save, complete our online energy comparison calculator.

Wholesale Energy FAQs

  • Why are gas prices rising?

    Rising gas prices in 2021 & 2022 is a result of a cold winter across Europe last year that has placed pressure on the gas supply. With a shortage on European gas storage levels, this means that wholesale energy costs have increased.

  • Does the wholesale market effect renewable sources?

    When markets change significantly it usually places stress on other parts of the industry.

    With a higher demand for to 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 less venerable to prices changes.

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