The state of wholesale energy

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We're committed to fair prices that truly reflect the cost of the energy we supply you. In this blog, we'll give insight into what's going on in the global wholesale energy market, to help you better understand trends in UK tariff prices.

Why are wholesale prices so important? The wholesale market is where suppliers buy the energy that they give to customers. Our cost to buy energy makes up a large chunk of every customer’s bill which means when the markets change significantly, our tariffs need to adjust as well.

The price most energy generators sell their power for is directly tied to the wholesale market price, not just the amount it costs to produce energy – which means that even suppliers who buy green power are impacted by rising gas prices. 

Energy prices are now three times higher than they were at the start of 2021– the highest prices on record 

In February 2021, Ofgem announced an increase to their energy price cap to adjust for wholesale prices rising. At that point, prices were 33% higher than they were 6 months before. Since then, prices have kept rising dramatically, driven by a range of factors:

  • Our global dependence on expensive, polluting gas. Despite an ever growing share of the UK's power coming from renewables, we're still far too reliant on gas (most of it imported) to heat our homes and generate electricity, especially when we need power at short notice – 39% of Great Britain's power still comes from burning gas.

    With that in mind, an imperfect storm has gathered, pushing Global gas prices to a 13 year high. Strong post-Covid industrial demand across China has raised prices in Asia, so Liquified Natural Gas (LNG) cargoes are currently choosing Asian gas hubs over European ones, raising prices here.

    What's more, droughts in China and Brazil have also led to lower hydropower generation, meaning there's more competition for gas, raising further. In a dark irony, the very real effects of climate change is driving international demand for fossil fuels, and we're literally feeling the cost.

    Supply from Russia is significantly lower than usual as well, leaving gas storage across Europe only 55-60% full - 33% lower than the 5 year average at this time of year (A new pipeline that will bypass Ukraine and run under the Baltic sea (NordStream2) is due to come on supply in 2021 and so the price of energy is expected to fall in 2022.)

    This, combined with significant gas and nuclear outages in the UK, and too few UK wind turbines to generate power from low wind levels have led to more gas, and even coal, being used for power production – pushing already rising wholesale gas and electricity costs to record levels.

    This is yet another reason why we're pushing so hard for a renewable revolution. As we generate more electricity from renewable sources like the wind and the sun (and move to electrify heating) the UK will become less exposed to changes in gas prices. For the time being, however, when gas is expensive, energy will be too.
  • The skyrocketing price of carbon offsets. Fossil fuel generators have to purchase carbon allowances to offset some of their emissions, and factor that into the price of their power. The price of these carbon offsets just reached an all-time high, soaring by 47% since April 2021, making the cost to buy gas yet even higher.

These conditions have only gotten worse throughout 2021, leading the energy regulator Ofgem to increase the UK’s energy price cap by £139 a few weeks ago. Suppliers across the board have had to adjust their energy tariffs to match their higher costs.

What does this mean for Octopus' tariffs?

We're committed to fair tariffs, where your prices reflect the cost of energy, with a small margin on top for us to cover our business costs. When there's sustained changes in the wholesale cost of energy, we do have to adjust accordingly, but we've consistently cut into our margins so we can increase prices as little, and as late as we possibly can.

Of course, we much prefer to bring prices down. We pass savings onto customers whenever we can – at the beginning of last year, when wholesale costs dropped, we were the first supplier to cut prices. We’ll continue to watch what’s going on in wholesale and bring you the very fairest prices we can, forever.

Published on 10th September 2021 by:

image of Nick Speechley

Nick Speechley

Green Energy Procurement Expert

Hey I'm Constantine, welcome to Octopus Energy!

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