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 (typically around 40%) which means when the markets change significantly, our tariffs need to adjust as well.

July 2021: Wholesale energy prices are going through one of the steepest rises we’ve ever seen.

2020 was truly a year like no other – we've written at length about how the pandemic affected energy prices, both in the home and across the global wholesale market.

Prices dropped sharply over the first half of last year in response to a 20% drop in national energy demand (mainly from businesses closing down), but then began to steadily rise back up again as the world started to get back on its feet, and they've kept rising ever since.

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. Right now, the wholesale cost of UK energy is over 50% higher than it was in February.

Why are global energy prices increasing so much?

We asked our energy-buying boffin, Nick, for his thoughts:

A photo of Nick Speechley

For starters, a fairly high portion of UK energy still comes from burning gas. Gas storage across Europe is currently 33% below the 5 year average for this time of year, and expectations of tight supply next winter are raising gas and power prices.

What’s more, an unexpectedly cold winter and strong post-Covid industrial demand across China raised prices in Asia, so Liquified Natural Gas (LNG) cargoes are currently favouring Asia over European gas hubs, raising prices here too. This is making the supply shortage in Europe worse too.

Russia's Gazprom also supplies gas to Europe through a number of pipelines. One of the major pipelines used to supply gas from Russia to Europe runs through Ukraine and sometimes local tensions can cause challenges here. In 2021 the flow of gas from Russia into Europe has already remained lower than expected despite European gas prices hitting 13 year highs. A new pipeline that will bypass Ukraine and run under the Baltic sea (NordStream2) is due to come on supply in 2021 and consequently the market expects the price of energy to fall in 2022.

Finally, under UK law power generators that emit carbon into the atmosphere are required to purchase carbon allowances to offset their emissions. The price of these allowances has been increasing steadily over the last 12 months. Since 1 February 2021 the price of the European carbon allowance benchmark has increased by 69%. Coupled with already expensive gas prices, the cost of burning gas to produce power is at multiple year highs.

Nick Speechley, Energy Procurement Expert

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 1st July 2021 by:

image of David Sykes

David Sykes

Head of Data Science

Hey I'm Constantine, welcome to Octopus Energy!

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