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Price watch

Energy price watch: the wholesale market and your bill

Illustration of someone looking at the energy market with binoculars

Since our last update in February, wholesale energy prices have fallen. As coronavirus (COVID-19) disrupts the global marketplace, the long-term outlook is uncertain.

Quite a bit has changed in the world since we announced a price change on March 2. In this post, we'll be taking a look at the impact of coronavirus on the energy market since then.

Wholesale costs fall due to coronavirus, but the long-term impact is unknown

In March we dropped our prices for a typical UK dual-fuel home by £56 per year thanks to lower wholesale gas costs. Electricity-only homes saw a price increase of £22 per year as we rebalanced our tariffs to take into account network and policy cost increases. For the rest of March, wholesale costs remained low as a result of mild weather, continued imports of liquified natural gas (LNG) and high gas storage levels across Europe.

The global wholesale energy market has dropped further as a result of coronavirus, and short term gas costs are now at multi-year lows. Since we announced our price change, wholesale costs have fallen by 2%.

In the long term, the picture is very uncertain. Coronavirus has wide-reaching consequences for energy markets, and some of what's causing prices to fall now may push them up later in the year. Like every business, we expect to be adapting to a new landscape as the economy begins to reopen.

Chart showing a 2% drop in wholesale costs since March
Notes: In April, Ofgem updated their typical average consumption figures. Annual energy bill shown here is for an Ofgem medium energy user on a standard dual-fuel tariff. Source: Bulb data.

Network costs increase as demand falls to record lows

Wholesale costs make up around 38% of your energy bill, but other costs also impact the numbers. Here's a reminder of the costs that make up an average dual fuel bill:

A chart showing the breakdown of an energy bill for the average home
Source: Ofgem. Notes: An estimate of the different costs that make up an average dual fuel bill for a typical domestic customer.

Coronavirus is causing unprecedented challenges for the energy grid. We're having to work harder than ever to keep the grid balanced during periods of low national demand and a high supply of renewable energy, which accounted for 60% of overall electricity generation at one peak last month. 

Network costs currently account for 24% of an average dual fuel bill. This bank holiday weekend, short term electricity prices went into negative as national demand fell to record lows. During periods of low-demand, the network incurs costs for switching off power plants and balancing surplus electricity in real time to prevent power cuts. National grid estimates these costs will reach £500 million over summer 2020, a figure which will be passed onto suppliers and generators as part of the Balance Service Use of System (BSUoS) charges, which will impact energy bills across the board.

In addition we expect to see increases to Feed In Tariff (FIT) levelisation and Contract for Difference (CFD) costs this Summer, which will affect all electricity bills.

What's causing changes to wholesale costs?

Briefly

We currently have an excess supply of gas and electricity, causing falls in wholesale costs

  • Coronavirus has seen global drops in demand for energy from business and industry

  • Gas storage levels are 25% higher than the average for this time of year

  • Electricity prices have fallen in line with gas and lower carbon market prices

Later in the year, the effects of coronavirus may push wholesale costs up

  • Low oil prices in the US could lead to lower associated gas production and therefore lower gas exports to Europe

  • Maintenance work on UK power plants and French nuclear plants are being pushed back into Autumn when demand is higher

In detail

Gas

Short term wholesale gas costs hit a 21-year low in the UK last week, and gas costs for the next 12 months are 5% lower than they were in March. We expect prices to remain volatile until the end of the year.

European gas storage stocks are 25% higher than the 5 year average for this time of year. Record LNG imports from the US and Asia, combined with mild weather last winter, meant stocks were healthy going into Spring. With warmer weather, domestic demand for gas dropped as fewer homes turned on their central heating. Since the outbreak of coronavirus, national demand for gas has decreased further as many businesses close their doors to comply with coronavirus lockdown measures.

Demand is expected to be low for the rest of the summer, even as European countries emerge from strict lockdown measures. This means prices are expected to remain low, or even to fall further in August and September as gas storage levels remain high.

Longer term, we could see the European gas market to be affected by changes in oil prices in the US. The recent collapse in oil prices has caused bankruptcies across small and mid-sized US oil producers. As gas is often created as a byproduct in oil production, we may see gas prices rise in America, which will make it less economically attractive to export gas to Europe. Without imported US gas, European wholesale prices could be higher this winter, especially if it's a cold one with high demand driven by domestic central heating.

Electricity

Electricity costs are now 1% lower than they were in March, but we expect prices to remain volatile for the rest of the year.

Residential demand for electricity has grown on average by 5% as more of us are at home for more hours of the day. As discussed over on the Bulb blog, there have been larger increases in demand during working hours. But overall, demand has dropped significantly from business and industry, driving costs down.

Lower carbon market prices have also contributed to falls in the wholesale cost of electricity. 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. With so many businesses and parts of industry shut down, the cost of carbon credits has fallen by 10% from pre-coronavirus levels, which we see reflected in electricity prices.

Looking further ahead, we can't be confident electricity costs will remain low. Scheduled maintenance on European power plants, particularly French nuclear sites, has been delayed by the coronavirus lockdown. Much of this maintenance, which is scheduled to happen in summertime when demand is lower, has been pushed back towards winter. This means supply will be reduced just as demand from homes and businesses is expected to return. This could lead to increases in wholesale electricity costs later this year

How does this affect your bill?

Wholesale gas and electricity prices are expected to remain low for the summer, but could rise again before the end of the year. The coronavirus crisis has made the wholesale market much harder to predict in the long term. In light of this uncertainty and an expected rise in network costs, we're not planning a change to our pricing.

Why do wholesale prices affect Bulb?

We always supply 100% renewable electricity and 100% carbon neutral 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 change, renewable prices change too.


As always, we'd love to hear your thoughts. Reach us at hello@bulb.co.uk or drop in on the Bulb Community where I'm hosting a Q&A about the wholesale market this week.