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.

September 2021: Wholesale costs have kept increasing, with prices now more than double what they were in April 

Just last month, we wrote about some of the factors driving UK wholesale energy prices (read the whole thing below). Those same key drivers have only gotten worse since. Prices continue to be incredibly high at the moment due to a combination of:

  • 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 – 39% of Great Britain's power still comes from burning gas.

    Supply from Russia is still significantly lower than usual, leaving gas storage at record lows. Droughts in China and Brazil have led to lower hydropower generation, meaning there's more competition for gas, sending prices up.

    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.

    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.
  • 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.

August 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 began to rise 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 have energy prices increased so much?

  • Global gas prices have reached a 13 year high
  • The price of carbon credits is 69% higher than it was 6 months ago

It's largely down to gas prices. If the price of gas rises, it's fairly easy to see how it might cost more to heat your home (after all, many homes in the UK still burn the stuff to keep warm). But that's not all. In the UK we still get a fairly large proportion of our electricity from burning gas too (around 40%), especially when we need power at short notice. With that in mind, if gas prices go up, the price of electricity does as well.

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.

With that in mind, let's dig a little deeper to work out why gas prices are rising:

  • First things first, Gas stores across Europe are currently only 55-60% full. This is 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 has raised prices in Asia, so Liquified Natural Gas (LNG) cargoes are currently choosing Asia gas hubs over European ones, which is also raising prices here. This is making the supply shortage in Europe worse too.
  • Russia's energy corporation Gazprom 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 so the price of energy is expected to fall in 2022.

Besides gas, other factors can contribute to higher prices too...

  • 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 carbon allowances has been rising 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 the highest its been in years.

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!