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How Is Energy Bought And Sold And How Does This Affect Prices?

The ongoing energy crisis is having a big effect on businesses of all sizes. The crisis has many causes – but what effect does the way energy is bought and sold have on energy prices?

In this guide, we’re going to take an in-depth look at that question. We’ll examine the UK energy market and how it works. We’ll also show you how comparing business energy suppliers is the best way to make sure you’re getting the right deal.

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What Is The UK Energy Market?

The UK energy market is fairly complex. To put it in the simplest terms, it involves energy suppliers buying electricity and gas which is then sold to consumers.

The two markets that have the most significant impact on your gas and electricity prices are the wholesale energy market and the retail energy market. So, let’s take a close look at each of these.

  • Retail market: This is where energy is sold to consumers by energy suppliers. Generally, consumers enter into fixed-term contracts with suppliers. Before entering into a fixed-term contract, you should compare business energy deals to get the best rates.
  • Wholesale market: This is where suppliers purchase gas and electricity to sell to consumers. The energy prices in this market are established by a forward delivery market and a spot market. Wholesale energy prices are notoriously volatile. The prices are subject to constant change based on consumer demand.

The UK energy market also includes two other markets. These are the balancing mechanism market and the balancing services market. These gas and electricity markets don’t affect your energy bills as much as the two we’ve already covered.

Still, it’s good to be aware of how they work.

  • Balancing mechanism market: This is a mechanism for balancing the amount of electricity that’s generated in the wholesale market with how much can actually be sold in the retail market.This is carried out by the Electricity System Operator (ESO) which is the National Grid. It uses a complicated system known as merit order to review bids and forecasts from electricity generators. It then takes whatever power is at the lowest price until consumer demand has been met.
  • Balancing services market: This market encompasses several different services from the ESO. These services are used to ensure service quality in the UK.

When Was The UK Energy Market Privatised?

In the UK, electricity was privatised in 1990 and British Gas was privatised in 1986. Since then, the majority of consumers have been getting their energy supply from one of the ‘big five’ suppliers. These are British Gas, Scottish Power, Ovo, EDF, and E.ON.

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The UK gets about half of its gas from the North Sea. The rest is imported from other countries such as Norway. Electricity generation in the UK is achieved through a combination of burning fossil fuels and using renewable energy sources.

Both business electricity and domestic electricity are generated in the same way.

This includes solar power, wind power, and nuclear power – and also importing renewable energy from various other countries.

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How Is The Retail Energy Market Structured?

The structure of the retail energy market can be broken down into three parts:

Generating energy

As mentioned, the UK generates its power by burning fossil fuels like gas and coal. It also uses renewable sources such as solar and wind.

Transporting energy

In the UK, electricity is transported via a grid. Gas is transported via the National Transmission System (NTS). These systems manage the supply and demand from businesses and homes.

Selling energy

The suppliers then purchase energy from generators and sell it to consumers.

How Is The UK’s Energy Supply Bought?

Business gas and electricity are bought by suppliers in the wholesale market and then sold to consumers. The price covers the costs that were incurred when the energy was produced.

The wholesale price of energy varies depending on the costs of generating energy to meet demand at a particular time. To try and match the expected demand for energy, suppliers buy it in bulk and in advance. This practice is known as hedging. We’ll go into this in more detail later on.

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How Is Energy Sold?

Once energy has been bought on the wholesale market it’s sold on the retail market with added costs, including:

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Does Renewable Energy Work Differently?

If you choose a green energy tariff then your supplier is buying your energy from renewable sources. This means the energy is being generated in ways that aren’t reliant on fossil fuels.

The markets for green energy work in the same way as they do for other types of energy, and the way the energy is transported is the same.

How Does The Way Energy Is Bought And Sold Affect The Price That I’ll Pay For My Energy?

There are several different factors that affect the amount you pay for your energy. Wholesale energy costs are responsible for about a third of your electricity bill. So, the wholesale price of energy is mostly responsible for rising energy prices.

Wholesale prices are affected by things such as supply and demand, and energy generation costs. Other factors that affect these prices include government policies and taxes, operating costs, and competition between businesses.

The cost of your business utilities can also vary depending on where your business is based. Local distribution networks have different levies which affect the energy prices in specific regions.

The huge rise in costs for energy recently has been caused by a combination of factors. The main reason is the Russian invasion of Ukraine which massively disrupted global supply chains. The lack of storage space available for gas and the spike in demand after the Covid-19 pandemic have also contributed to these price increases.

Energy suppliers hadn’t properly hedged on these factors which means that the increased wholesale prices of energy have been passed onto the consumer.

Suppliers buy energy in advance in order to keep prices and supplies as stable as possible. The huge increase in demand for energy meant that suppliers needed to buy more energy from the spot market. This has led to them paying more for energy which, in turn, means businesses have to pay more for theirs.

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How Is The Price Of Energy Determined?

In the UK, there is a national pricing model which means that wholesale energy is all the same price at the same time. The price changes depending on the costs of generating energy at a specific time.

Another system called marginal cost pricing is also used. This means that the price for every type of energy is fixed to the price for the most expensive type of generation.

Compare Business Energy Rates With Business Energy Comparison

Unfortunately, there is nothing you and your business can do to affect the wholesale prices of energy. However, there is a way for you to save money on your energy bills.

You should always make sure that you compare business energy deals in order to find the best deal available. Each business has different energy needs. By comparing deals, you can find the one that suits your own business perfectly.

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Start your journey and compare business gas and electricity rates with Business Energy Comparison today. Use our price comparison tool and in less time than it takes to make a brew, we’ll compile your best prices from the UK’ s best suppliers.

Final Thoughts

The UK energy market is a complex system and it can be tricky to fully understand it. There are many different factors that affect energy prices for businesses, including the way energy is bought and sold.

The main thing to remember is that the wholesale cost of energy is usually the main culprit when it comes to price increases.

The best way to reduce your business’s electricity and gas bills is to compare rates and deals from different suppliers. You should consider using a broker or consultant from Business Energy Comparison to do this. You may have no control over the volatility of the UK energy market. Yet, you can control the supplier that you choose for your business.

Frequently Asked Questions

Is electricity cheaper than gas for businesses?

As a percentage of the total price, the wholesale costs of electricity are lower than they are for gas. The reason that electricity tends to be more expensive than gas for consumers is due to the environmental taxes imposed on it by the government.

As of April 1st, 2023, the Climate Change Levy rate that businesses pay on electricity is 0.775p per kWh. The levy for gas is currently 0.672p per kWh.

Do businesses pay VAT for energy in the UK?

Yes, in the UK, the VAT rate on both business gas and electricity is 20%. However, if your business uses limited electricity and gas then you may be eligible to pay a lower rate of 5%. The government offers this discount to encourage businesses to be more energy efficient.