Wholesale energy: what's going on and why it matters

Wholesale energy costs make up around 40% of most people’s energy bills. There’s been noticeable volatility in wholesale electricity and gas markets recently. So, we wanted to give a more detailed explanation of what’s been going on.

 
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All our electricity comes from renewable generators. But the price we buy it at is underpinned by the wholesale cost of energy. We buy the majority of the gas we supply in the wholesale market too. So, to keep Bulb members’ energy as affordable as we can, we pay close attention to wholesale cost.

 

Whole-say what now?

The wholesale energy market is where electricity and gas are bought (typically by energy suppliers) and sold (typically by generators and gas producers). Buyers and sellers exchange contracts. These contracts agree that the seller will deliver the agreed volume of gas or electricity to the buyer to the national grid on a particular future delivery date at a pre-agreed price.

There are many drivers of wholesale prices. Weather forecasts, currency fluctuations, the price of oil, power station outages, to name just a few.

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Recent trends in wholesale prices

Exchanges on the market take place as far as five years into the future. So there has been a “price” of energy for Winter 16/17 since 2011. The chart below shows what has happened to the wholesale price of energy for Winter 16/17 over the last two years.

 
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Wholesale prices have generally moved downwards over the last three years. The main causes of this have been:

Mild winters – Warmer temperatures mean reduced demand. There hasn’t been a properly cold winter since 2010/11 (which was on average 2 degrees celsius below normal).

Improved efficiency – Better heating and insulation in homes has seen a long-term fall in gas demand.

New, cheaper sources of gas – From countries like Qatar that have started exporting Liquified Natural Gas.

Reduced global fossil fuel demand – Due to an increase in the amount of renewables and reduced demand from countries like China.

 

Up, up and away?

However, over the last three months, we have seen a break from this downward trend (as you can see in the chart above). There are a number of shorter-term factors that have caused this to happen:

Maintenance – Summer maintenance at UK power stations has taken longer than expected. The UK’s largest gas storage facility, Rough, has been out of action due to ongoing maintenance work, which means that the UK will have a lower amount of gas in storage to rely on this Winter. But it’s not only in the UK. Reduced availability from French Nuclear plants due to safety work may lead to lower imports of electricity from France this Winter. The UK relies on about around 2 GW of French electricity imports during peak periods in the Winter.

Global Economic factors – A rebound in global oil and coal prices, which are drivers for electricity and gas wholesale prices. The devaluation of the pound post-Brexit has made it more expensive for the UK to import energy – which we do a heck of a lot.

Safety Concerns – Europe’s largest onshore gas field, Groningen in the Netherlands, has had its production capacity reduced due to ongoing local protests over the impact the field is having on local communities (tremors causing damage to homes in the area).

It is clear that supply margins (which are the amount of spare supply capacity we have at maximum demand) are tighter in the UK than they have been for some years. A cold Winter could potentially drive wholesale prices yet higher.

 

What does this mean for Bulb members?

Other suppliers seem to keep their approach to pricing a mystery. The assumption appears to be it’s all too complicated for people to understand. We disagree. At Bulb, we want to be as clear and open as possible with you about what goes into the cost of your energy. When you’re dropping hundreds of quid every year on something, it seems only fair you understand why it costs what it does, right?

So to be clear: At Bulb, we’re committed to being transparent about our pricing. We pass any savings on to our members as soon as possible. That’s why we’ve had 5 price drops over the last year. Likewise, we’re committed to waiting as long as possible before raising prices. That’s why we haven’t raised our prices at all despite recent increases in the wholesale cost of energy. Over this coming winter, we’ll be doing everything we can to insulate our members from the ups and downs (well just the ups actually!) of the wholesale energy market.

You can always get in touch to talk to us about this or any other issue by emailing help@bulb.co.uk or calling 0300 30 30 635.

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