Most people will have heard the term ‘wholesale energy price’ but what exactly is it?
Making up around 40-45% of your bill, it is an important contributor towards how high or low your energy tariff will be. The term refers to the price that the energy suppliers must pay the generation companies for gas and electricity.
How much does the wholesale cost change?
With the main driver of the wholesale cost being supply and demand, the price will vary across the year. Winter is an obvious stand out time of the year when demand will be higher. On the opposite end of the scale, summer months will also see a strong rise in demand for power. To counteract this, energy suppliers tend to bulk buy energy in advance. This allows them to use a stable figure to forecast tariffs.
That said, year on year, the wholesale price is not always such an obvious source of blame for price rises. As an example, the wholesale electricity price in January 2016 was £36.95 per MWh (MegaWatt hour). In January 2020 it was sitting at a lower figure of £33.93. Using the same two points in time, comparing the wholesale figure with average electricity bills does not look good for the energy suppliers. In January 2016 the average electricity bill in the UK was £590.15, rising to £679 in January 2020. Between these dates the wholesale price has spiked up and down fairly regularly but the average bill has been on an almost exclusively upward trend.
How will the wholesale market react over the next few years?
It is difficult to know for sure. Brexit will play a huge role as underwater gas pipelines and electrical cables used to transfer energy to and from mainland Europe come under new rules.
Potentially the biggest driver of the wholesale market will be some incredibly big infrastructure changes. Many coal and gas fired power plants are closing down or being reverted to a standby mode. Production of energy has shifted towards solar, nuclear and in particular wind power. This will be a big help towards the UK’s carbon neutral ambitions but is likely to cause a rise in wholesale costs, at least in the short to medium term.
Perhaps the best example of potential price rises lies with the Hinkley Point C Nuclear Power Station. This plant could have a big impact, even without taking into account delays, rising construction costs and some fierce opposition to its very existence. The problem with Hinkley Point C is with the initial deal that was drawn up for the plant. The price of constructing and maintaining the plant is a fixed wholesale cost of £92.50 MWh. Comparing that price with January 2020’s £33.93 may make you gasp. To learn that this deal will be fixed for 35 years is worrying for the future of our bills.
Infrastructure will not be the only factor impacting the bills of each and every consumer. Governments have begun forming legislation to end the use of gas in the home within the next 10-15 years. New build homes are already preparing for incoming legislation which will ban gas boilers. As far as heating is concerned, we have alternative and effective methods to warm our homes. The problem is that they are almost always more expensive than gas and that is at today’s prices. Once demand for electricity grows due to switching heating methods, the wholesale price will react by rising along with that demand.
What about the long term?
Again, this is still uncertain. A recent Government study has concluded that any investment in a green future will eventually prove cost neutral. This is because once we have an established wind power-based generation structure in place, costs will drop dramatically.
The wholesale price of energy has a big effect on your bill but it is not the only factor. Trends have shown that consumer bills will continue to rise even when the wholesale price remains steady or even falls. In the long term this should provide the UK with clean, safe and reliable energy. In the short to medium term, it is an unfortunate consequence that bills will continue to rise. Making your own home more efficient and switching regularly will help to keep costs as low as possible.