Price watch

Energy price watch: the wholesale market and your bill

A picture of the wholesale and finance team at work at Bulb

The wholesale cost of gas has continued to fall since February, but the market is currently volatile. We’ll be keeping an eye on things.

We last updated you in February, when we lowered our gas rates for members, saving the average home £20 per year. Since then, the wholesale cost of energy has continued to fall, but the market has been volatile. Today, wholesale energy prices are around 8% lower than they were in February. However, April saw unprecedented spikes in the cost of energy. The market has settled, but it isn’t clear how it will behave from here. For now, we’ll be keeping an eye on things and will write again if a change to your energy bill is on the horizon.

The wholesale cost of energy has fallen, but the market is volatile

Wholesale energy costs have continued to fall and are now 8% lower than they were in February. Until April, electricity and gas prices fell at significant pace, continuing the trend we’d seen earlier in the year. However, from April, prices bucked this trend and began to rise. The market was exceptionally volatile for a number of weeks. While there are some clear causes to this volatility, speculation in the market has played a large part.

A graph showing the annual bill at Bulb vs the wholesale cost of energy
Note: Annual cost for an Ofgem medium energy user on a standard dual-fuel tariff in the London region. Wholesale energy costs make up around 40% of your bill. Source: Bulb data.

What’s causing changes to the cost of energy?

The headlines

  • Wholesale gas costs are 11% lower than they were in February. We ended winter with high gas storage stocks due to mild weather in Europe and Asia

  • Wholesale electricity costs are 4% lower than they were in February

  • In April wholesale energy costs were significantly volatile, largely driven by speculation in the market

  • Prices have settled since April but it’s not clear how the market will behave from here

  • There are fears that gas supplies from Russia to Europe could be lower this coming Winter, as a key gas transit contract between Russia and Ukraine comes to an end from 1st Jan 2020.

The detail

Gas

Wholesale gas costs have dropped by around 11% since February.

From February to April, the wholesale cost of gas fell significantly. In late March, prices were around 15% lower than they had been in February. We ended winter with high gas storage stocks across Europe thanks to a mild end to winter here. Plus, Asia experienced a mild end to winter too. As a result, we received high deliveries of Liquified Natural Gas (LNG).

In April, this downwards trend ended and costs began to rise. The beginning of the month saw unprecedented volatility; costs went up by 15% in a matter of days. There were some clear contributors to this volatility. In Norway, gas stations decided to turn down the supply of gas to mainland Europe and the UK while the price was low. And in the week before Easter, Europe experienced a cold snap. These two things contributed to higher wholesale gas costs.

But overall, a lot of the volatility in the market has been driven by speculation. The market isn't abstract: it is driven by the behaviour of those buying and selling within it. If players in the market begin to be concerned about their position, they take action that affects the rest of the market. The fluctuation in costs that we have seen this Summer in the market is the result of this.

Looking ahead, we may see further volatility in the market. There are fears that gas supplies from Russia to Europe could be lower this coming Winter. Russia and Ukraine haven’t renewed a gas transit contract which is coming to an end from 1st Jan 2020. More than a third of Europe’s gas comes from Russia, and most of that travels through Ukraine’s pipelines. So while gas is currently well-stocked across Europe, transit via Ukraine remains an important supply of gas for Europe in the winter. It’s important the two countries secure a new contract to avoid rising wholesale gas costs. We’ll write again on this in our next wholesale update.

Electricity

Wholesale electricity costs are now around 4% lower than they were in February. This is driven by the change in gas prices. The UK is still heavily dependent on gas-fired power plants for electricity generation. So, lower wholesale gas costs mean lower wholesale electricity costs too.

Wholesale electricity costs haven’t come down as much as gas costs. This is unusual, as the two usually run in line with one another. This was due to increases in the cost of carbon. Large carbon emitters (for example, coal-fired power stations) are required to purchase carbon credits via the EU Emissions Trading System in order to emit carbon. In April, this cost hit a 10-year high, driving the wholesale cost of electricity up.

How does this affect your bill?

At Bulb, the price you pay for energy reflects the true cost of supplying energy. While wholesale costs are lower, we aren’t planning to change the price of our energy as the market is currently erratic. Looking ahead, it's hard to know how the wholesale cost of energy will change. So as normal we’ll be keeping an eye on things and will update members if things change.

A change to our price change notice period

We aren’t planning a price rise any time soon, but from now on we’ll give members 30 days notice if we do. Historically, we gave members 60 days, double what Ofgem require. After looking at the data, we realised the longer notice period comes with a cost for members. By giving an extra month of notice we have to increase prices further in the long run in order to operate sustainably. Members also aren't using the 60 days to mull things over and make a decision. Decreasing the notice period will reduce the impact of future price rises and give members the time they need to work out what’s best for them. We suggested this change to the Bulb Community who support a 30 day notice period. You can see the discussion here.

Why do wholesale prices affect Bulb?

We always buy 100% renewable electricity and 10% green gas. However, renewable generators will sell to whoever is prepared to pay for their energy (and rightly so!). This means that when fossil fuel prices go up, renewable prices go up too.


As always, we’d love to hear any thoughts or questions you have on this. Reach us at hello@bulb.co.uk or drop in on the Bulb Community.