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Wholesale Energy Prices Explained

Your business energy costs greatly affect your monthly expenses and make up a large part of your bills. Understanding the factors that affect costs is important.

These include network expenses, operational charges, government policy expenses, energy supplier pricing, pre-tax profit, and certain direct costs. Wholesale energy prices are the biggest factor, usually making up more than one-third of the total bill.

To predict future price changes, it is crucial to comprehend business energy and its market trends. Learn about wholesale energy prices in our guide to understand the energy market and find answers to key questions.

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What is wholesale energy?

The wholesale market serves as the arena for the exchange between generators and suppliers of power stations. Suppliers purchase cheap energy from generators, add profit, and sell it to customers at a higher cost.

Many factors, such as changing supply and demand, easily affect the energy market, making it very unpredictable. This volatility translates to the potential for substantial and rapid fluctuations in prices.

While energy consumers don’t directly engage with wholesale energy costs, being aware of these factors becomes valuable. Knowing this is important because the cost of energy affects how much your business gas and electricity bills will be.

Wholesale energy market vs. retail

The retail sector is where most businesses buy their gas and electricity from suppliers, unlike the wholesale market. There are approximately 60 energy suppliers in the UK. However, the ‘Big Five’ dominate the gas and electricity market. The ‘Big Five’ includes British Gas, E.ON UK, EDF Energy, SSE, and Scottish Power.

Given the multitude of suppliers and the availability of various business energy tariffs, the retail market offers the opportunity to discover highly competitive business energy deals.

As highlighted earlier, the cost you incur for gas and electricity from your supplier is contingent on several factors, with wholesale energy prices emerging as a key variable. Suppliers will probably increase their energy prices to match the rise in wholesale prices of electricity and gas.

How does the wholesale energy market work?

The UK’s energy supply has three main parts: generating gas and electricity, transporting it, and delivering it to users. Energy companies can focus on different parts of making electricity, or they can be involved in all steps.

Within this guide, we delve into a detailed examination of the operations of the wholesale energy markets for both natural gas and electricity.

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Fossil fuels do not have the ability to store electricity in significant quantities. Consequently, a continual balance between supply and demand is essential. In the UK, generators, suppliers, traders, and customers actively manage this equilibrium by participating in the wholesale electricity market.

Trading purchase of electricity in this market occurs through various mechanisms. Bilateral agreements, for instance, involve contracts negotiated between generators and suppliers for the procurement of electricity.

Typically, companies structure these agreements under a master contract for a specified duration, establishing overarching trading principles. Individual trading agreements then stipulate the quantities of electricity to be purchased, along with the agreed-upon trading prices. To prevent imbalances in supply and demand, generators inform the National Grid of the traded electricity volume before its delivery.

Wholesale electricity trading can also occur through same-day or next-day exchanges, employing an auction process that aligns selling prices offered by generators with bids from suppliers. Once again, the National Grid monitors traded retail electricity market volumes to prevent market imbalances.

In a more long-term electricity market context, electricity is traded through electricity brokers, with wholesale prices determined based on forecasted market developments.

Functioning as the ‘residual balancer,’ the National Grid Electricity Transmission (NGET) is tasked with ensuring real-time alignment of the electricity system between supply and demand. The Balancing Mechanism is one of the tools used by NGET, allowing it to accept offers of electricity and bid for energy at very short notice, thereby maintaining the necessary equilibrium.

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Why are wholesale energy prices rising?

Business energy prices can change for various reasons. While they typically experience fluctuations, there has been a significant increase in electricity prices over the past year. Several factors contribute to this surge:

  1. Inadequate gas storage exists across Britain and Europe, stemming from heightened usage in the first half of 2021.
  2. The year 2021 experienced notably cold temperatures, resulting in an upswing in gas consumption.
  3. Reduced deliveries through European pipelines have led to an escalation in wholesale electricity and gas prices.

Wholesale energy prices forecast

Fluctuations in wholesale energy prices can be substantial, as evident in significant variations reported by Ofgem between 2010 and the beginning of 2020. It’s important to note that due to the vast quantities of electricity traded in the wholesale market, these figures are commonly expressed in terms of a megawatt-hour (MWh), equivalent to 1,000 kWh.

Ofgem’s historical data also reveals that the highest wholesale electricity price for next working day delivery at a constant baseload rate within the 10 years occurred in September 2018 at £67.69 per MWh, subsequently decreasing to £35.93 per MWh in January 2020.

Predicting future UK wholesale electricity and gas prices is challenging because of the dynamic nature of energy price fluctuations. Various factors, such as available supply, environmental incidents, geopolitical events, and consumer demand, come into play.

The ongoing COVID-19 pandemic adds an extra layer of uncertainty, significantly impacting gas and electricity markets by contributing to a decline in oil prices and reductions in other fossil fuel prices.

According to the European Parliament, the pandemic’s continued influence on global energy markets hinges on the nature and speed of economic recovery, along with decisions made by policymakers. A swift recovery and a return to typical international trade may lead to a rebound in fossil fuel prices, while a more gradual recovery with reduced global trade could result in sustained low prices, potentially accompanied by structural shifts in the energy market.

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How to buy wholesale electricity

Curious about procuring electricity wholesale prices? While some large industrial businesses with substantial energy consumption levels engage in wholesale electricity purchases, this practice is relatively rare and has emerged only recently. In the majority of cases, businesses opt for purchasing energy through the retail market, involving transactions with suppliers rather than direct dealings with electricity generators themselves.

When seeking the optimal deal, navigating the retail market rather than the wholesale one becomes crucial. Given the multitude of companies, suppliers and tariff options, identifying a competitive business energy deal can be overwhelming. However, there are straightforward steps you can take to facilitate the process and ensure you secure the right contract for your business.

Compare gas and electricity prices with Business Energy Comparison

At Business Energy Comparison, we scour the market to find the cheapest energy deals for your business. Our dedicated team can conduct a thorough market search on your company’s behalf.

Whether your business operates in industrial premises, warehouses, shops, offices, or any other sector, and regardless of your company’s size, we are equipped to help your business compare the market to find the best energy tariff avaliable.