Wholesale energy prices in the UK: how do they affect your bills?
By Stephen Marcus Wednesday 24 February 2021
Getting your head around wholesale energy prices can be challenging. What do suppliers pay for gas and electricity, and what does it mean for you? It’s a simple question, but finding the answer can be tricky.
In this guide we’ll explain what wholesale energy prices are, how important they are for your bills, and how they’ve changed.
What are wholesale energy prices?
Wholesale energy prices are the prices suppliers pay when buying energy to deliver to customers. Like any market, the prices can change – they go up and down, in response to things like supply and demand.
In winter, for instance, people turn their heating up and switch their lights on earlier. That creates more demand, and pushes prices up. But in the longer term, energy prices are affected by other things, too – such as whether there’s a steady supply of gas or electricity, or if people’s energy habits change.
What is the wholesale price of electricity in the UK?
The price for wholesale energy depends on when you buy it. You can buy it a day before you need it, or you can buy it months, or even years ahead. But buying further ahead of time isn’t always cheaper. It can still be affected by local and geopolitical issues – things like gas shipments not turning up, or storage issues, which can push prices up or down.
The day-ahead prices – what you pay if you buy it a day before you need it – are a good way of seeing the general trends for wholesale prices. The most recent day-ahead price for electricity is £45 per megawatt-hour (MWh). By the way, a MWh is a thousand kilowatt-hours (kWH), and kWh are what we use to measure our energy bills at home. If you want to learn more, check our guide to what a kWh is.
Want to find out more about average electricity prices? Check out our guide to average electricity prices around the world.
What is the wholesale price of gas in the UK?
Like electricity, gas prices depend on how and when you buy it. The most recent day-ahead price for gas is 38p per Therm. And if you’re wondering, one Therm is equal to 29.3 kWh.
In the graph below, you can see how gas and electricity prices have changed over the past 3 years. March 2020 shows a dip in prices around the first Coronavirus lockdown – and you can see how they’re now beginning to return to their previous level.
Want to see how your bill compares to everyone else’s? Read our guide to the average gas and electricity price in the UK.
If you’re looking for other ways to cut your bills and carbon footprint, switch to OVO today, to start saving – and get 100% renewable electricity included as standard. Get a quote in 2 minutes.
How does the wholesale energy market work?
As we mentioned, suppliers use different approaches to buy energy in the wholesale market – from years in advance, to the day before. Part of the challenge for suppliers is predicting when energy will be cheaper and how much they’ll need, so they can buy the right amount at lower prices, to give customers a better deal.
Prices change at different times, due to supply and demand. This means they go up or down depending on how much there is to sell, and the number of people wanting to buy it.
In the UK, the price of electricity is partly linked to the price of gas. This is because we use gas to generate electricity – so the price of electricity tends to go up or down, in line with gas prices. In the future, prices will be more affected by the growing amount of renewable energy being generated – which will be another challenge for energy suppliers to navigate.
How do wholesale energy prices affect your bills?
If you have a fixed-rate tariff – the price of your bill won’t change during the tariff period. This means wholesale prices won’t affect your bills until your fixed-rate tariff ends.
If you have a variable tariff – the price you pay can change, because of wholesale prices. The Ofgem price cap tells suppliers what they can charge customers on variable tariffs, and if wholesale prices change, then Ofgem will adjust the cap.
Want to know more about tariff types? Check out our guide to fixed-rate tariffs and how they work.
As you can see in the charts below, wholesale costs make up the biggest chunk of a typical energy bill. But they’re not the only cost. Network and operating costs also take up a big portion.
What makes up your energy bill? These 3 charts break down the different costs:
What affects wholesale electricity and gas prices?
While supply and demand plays a big part in wholesale prices, there are a few other factors, too:
Renewable energy – as we get more of our energy from renewables like solar and wind, they’ve begun to replace traditional energy sources in the National Grid. This leads to lower wholesale prices, especially at times where there’s low demand.
Gas prices – as electricity prices are partly driven by the cost of gas, this means that the price of gas affects wholesale prices overall. If gas prices go up or down, so does the price of electricity.
Interconnectors – these are cables that run under the sea, allowing us to import and export electricity to and from our neighbours in Europe. This means we can buy it from elsewhere when our price is higher, and sell it when the price goes up in neighbouring countries.
Have wholesale electricity and gas prices increased?
Over the past few years, the prices of gas and electricity have been mostly going down. There are a few reasons for this:
From the end of 2018, there was a global surplus of gas – the UK bought up a lot of this surplus, which made it cheaper.
Mild weather during the past few winters has caused us to use less heating. This has meant less demand for gas, and so the price has gone down.
Covid-19 has caused a decrease in activity and energy use. This has also meant we’ve needed less energy, so there’s been less demand.
But this trend is now starting to change, as energy prices start to recover to levels much like before. This is the reason that Ofgem are raising energy prices in April 2021, returning them to pre- pandemic levels.
Have wholesale energy prices been driving up bills?
Wholesale prices have actually led to cheaper bills over the past year or 2. In October 2020, Ofgem reduced the price cap for suppliers by £84 a year, making it the lowest it’s ever been! That lower price was due to the reduced demand for energy caused by Covid-19, which led to lower wholesale prices.
Longer term, rising prices do, of course, cause our bills go up. As you can see in the chart below, from 2017 to 2018, fuel prices were climbing – and it was only our reduced energy use that kept the typical bill price relatively stable.
The good news is: as more of us make our homes more energy-efficient, we’ll need to use even less energy. And that means cheaper bills!
To find out more about how to manage your energy use, find out how much energy you use for heating, learn how to reduce your gas and electricity bills, and discover the world’s best low carbon heating options.
What does OVO do to keep costs down?
At OVO, we’re committed to offering a great deal for our members, while helping them make small changes to live a greener lifestyle.
We watch the wholesale markets closely, buying energy when it’s cheapest, so that we can get the best deal possible – and we pass these savings on to our members. We also offer 100% renewable electricity as standard, so you can lower your carbon footprint and enjoy competitively-priced green energy.
Interested in making the switch? Get a quote in 2 minutes, and benefit from:
Competitively-priced 100% renewable electricity as standard
A 5 Star TrustPilot rating by 25,000 members
A tree planted for every year you’re with us
3-5% interest for every year your account is in credit
A £50 gift card every time you introduce a friend to OVO
Sources and references
3. The renewable electricity we sell is backed by renewable certificates (Renewable Energy Guarantee of Origin certificates (REGOs)). See here for details on REGO certificates and how these work.
7./8. The renewable electricity we sell is backed by renewable certificates (Renewable Energy Guarantee of Origin certificates (REGOs)). See here for details on REGO certificates and how these work.
9. Each year, OVO plants 1 tree for every member in partnership with the Woodland Trust. Trees absorb carbon dioxide from the atmosphere, so tree-planting helps to slow down climate change.
10. Interest Rewards are paid on credit balances of customers paying by monthly Direct Debit. It is calculated at 3% in your first year, 4% in your second year and 5% in your third year (and every year thereafter) if you pay by Direct Debit.