Energy's a complicated business, we know. But part of being straight up means demystifying the stuff that's always been a bit smoke and mirrors, like wholesale energy prices.
We keep a beady eye on wholesale prices, buy smart and pass on the savings to you through our energy plans. This (and keeping our running costs as low as possible) is how you get cheaper, greener electricity and gas.
In this guide we are going to try and explain what wholesale energy prices are, how important they are for bills, and how they have changed over the years.
Wholesale energy prices are those set by the traded market, and they can change every day – generally going up and down with supply and demand.
In winter, for instance, people turn their heating up and put their lights on earlier, which creates more demand and pushes prices up. However, in the longer term, energy prices are affected by many things – particularly what’s happening in global energy markets.
Wholesale energy prices play an important role in energy bills.
According to data from Ofgem, the market regulator, by 2013 wholesale energy prices accounted for almost half of the average dual fuel bill, costing each household over £600 per year (see below).
The next major contributors to the total bill were network costs (£282), operating costs (£168) and environmental and social levies (£111). These figures are the averages for the Big Six energy companies.
For further information check out Ofgem’s outlook for costs that make up energy bills – their graphs and charts detail your bill breakdown in more depth.
With wholesale energy prices making up almost half of the average home’s energy bills, there has been a lot of discussion about their role in increasing costs.
Indeed, research by the Climate Change Committee shows that over the last decade, rising wholesale energy prices have been the major issue pushing up bills (see below).
In the decade from 2004 to 2013, the average dual fuel bill rose by almost £500 a year. Although there were also significant increases in network and operating costs, as well as those from environmental and social programs, these were largely cancelled out by a reduction in energy demand.
The huge rise in wholesale costs has been the biggest issue for households, and largely reflects the increasing exposure of the UK to international energy markets. As late as 2003, the UK was still a net exporter of natural gas; just 10 years later, and we import more than 50% of the gas we use. The introduction of the UK to expensive natural gas, like LNG from Qatar, has certainly played a large part in the increase in energy prices over the last decade.
Since we don’t generate our own energy, we have to buy it from the wholesale energy market. We have our own team of traders and analysts, who monitor price movements throughout the day so we can buy at the right time. That’s how we purchase your energy at the very best prices, then pass the savings to you.
You won't see prices going up and down on your bill if you're on the Better or Greener Energy Plan, because you fix your price at the beginning. This means you know what you'll pay today and tomorrow, even when wholesale energy prices go up. But if you're on our variable rate Simpler Energy Plan, we pass savings directly to you month-to-month.
The chart below gives you an idea of how wholesale prices have changed in recent times.
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