How confident would you be signing a long-term contract with no set price defined?
Well… You just wouldn’t sign it, probably. It seems counterproductive to enter into a lengthy agreement for any service or product without knowing the price you’ll need to pay.
But – there is a niche area of the energy industry where customers actively seek out flexible contracts where the price fluctuates in response to market movements.
The fact of the matter is, these customers (if they’re on the ball) stand to potentially save huge sums of money over the course of their contracts.
In this article we’ll explore the background behind these types of contracts, how price fluctuates, and the best ways that customers can track the price of their energy.
The wholesale gas market – a brief background
The wholesale energy market allows suppliers to buy and sell large quantities of energy to and from one another. It is not just buying and selling between producers and suppliers (a common misconception), but rather multi-stage trading between entities from more operational backgrounds than you can shake a stick at!
In today’s market, smaller independent energy producers are also able to take part. This is stimulating the growth of new energy companies. You can see represented in the incredible growth in number of energy suppliers in the UK.
The wholesale gas market for the UK has only one price for gas irrespective of where the gas comes from. This is called the National Balancing Point (NBP).
Flexible Gas Contracts – Passing on the Benefits of the wholesale market
Flexible gas contracts are still something that aren’t really common knowledge – which is why informative articles like this one are needed. In a nutshell, flexible energy contracts allow customers to take advantage of the incredible price volatility in the wholesale energy market.
The profile shape of the customer’s demand (consumption) trend is split into two separate categories. These are the baseload, and peak. The baseload can be thought of as the main bulk of demand and is the predictable portion of the customers energy. Most businesses will be able to provide accurate estimations as they have access to much more detailed levels of data. This is usually through combinations of smart meters, sub-meters, and even auditing.
The peak is essentially the spike in demand outside of predictable baseload. The stuff that nobody foresaw needing. This peak demand makes up the tradeable volume that is able to be traded within flexible contracts.
The wholesale gas market trades this volume in set blocks, although the match-up between the block and customer profile may not entirely match. As a result of this – customers are able to buy a block of energy that may or may not exceed their total usage. There are actions to resolve any mismatches of demand and purchased volume.
Where the purchased baseload and peak volumes exceed the customers profile the gas can be sold back to the supplier. In addition to this, when purchased baseload and peak volumes fall under actual customer consumption needs, customers are able to ‘top-up’ and purchase extra volume in smaller blocks.
This is where the term ‘flexible’ energy contract really comes from – it allows a much greater degree of freedom to the customer. This is the vector by which the risk and reward of the wholesale gas market is passed onto customers.
How does the wholesale energy market effect energy prices?
So, as we have ascertained in the last two sections – the price of gas is uniform across the wholesale gas market, shifts regularly, and flexible contracts determine their prices from the market price at any given point in time.
This is all it really boils down to. The wholesale energy price represents a massive portion of costs for suppliers in providing gas supplies to customers. So, when the price of gas in the wholesale market rises (we’ll cover the mechanisms behind this later) suppliers have to raise the prices imposed on customers to safeguard profits.
We have included a standard cost breakdown from a supplier point of view for a standard UK customer below. Figures are approximations and there will be variance between customer type, scale, etc.
What affects wholesale energy prices?
As can be seen above – the wholesale price of energy holds the strongest influence over the customer price for energy.
But what factors influence the price of wholesale gas/energy?
- Supply & Demand: The wholesale energy market should be held up as a case study to observe the mechanisms of supply and demand in action. As demand for energy rises, so too will the price. Likewise, if total supply falls the price will also rise. The converse of these two statements is also true.
- Sustainability: If the market is dominated by sustainable energy that can continue to be exploited indefinitely – it will result in a more stable market price. If the market is dominated by finitely sourced energy, the supply will inevitably falter – leading to a more volatile price.
- Relative strength of currency: As the UK imports a large volume of energy from the EU, the relative strength of the pound against the euro will play a huge part in defining the market price.
- Seasonal changes: In the summer demand for energy will fall as generally speaking the UK will require less energy to heat their homes. When demand falls, so too does the market price.
- Carbon Tax: The push towards carbon neutrality across the UK and the EU has led to governments taxing the worst offenders for carbon emissions. This can include energy suppliers, resulting in upwards price pressure.
- Global events: We are currently in the middle of a great example of a global event influencing the wholesale price of energy – Coronavirus.
The price of power – who decides?
It is not a question of who, more a case of what decides.
The what in question, is gas.
The UK energy mix is dominated by gas, and as such can be categorically determined to be the ‘price-setter’ of power. Any market changes or industry happenings at any level throughout gas production and supply will have a far larger knock-on effect than any other energy source.
Resources for those who want to track prices
Price changes in the wholesale market can be pre-emptively predicted in much the same way as changes in any other market.
By implementing the theory covered earlier into news events, industry happenings, or government actions – it is possible to understand the upcoming movements in price. This can be completed with varying degrees of success.
The problem with the wholesale gas market is that it exhibits incredible price volatility. By incredible, it truly is incredible – updating every thirty minutes. The solution for those looking to get an edge? Online price-tracking tools.
Ofgem is the natural location to find the majority of these tools, graphs, and data. As this is the regulatory body for the UK energy industry, it is a trustworthy (and comprehensive) source of information. We have included a link to this below.
But what about a tool for those with a more specific set of goals? The Ofgem tools are wonderful for those who would like to get a general overview of the wholesale gas/energy markets – but not for those who operate within it.
For those looking for a stripped back and streamlined tool made by energy industry specialists, for energy industry specialists – look no further…
A simpler approach to wholesale gas price tracking
Let’s be honest – no one has the time to spare to commit to tracking wholesale gas prices alongside their usual business commitments. Like many things, it is a great idea in theory – but in reality it isn’t actually feasible.
That is why at Energy Solutions, we have created an online intelligence tool that does it all for you. The tool is free for all and is incredibly user friendly – something that is rare when dealing with such a complex task.
You can check out the online tool here at: intelligence.energybrokers.co.uk
Google Snippets
What is the wholesale energy market?
The wholesale energy market is where energy suppliers (and others) buy bulk units of energy from energy producers with the intention of reselling for a profit to customers.
What are flexible contracts?
Flexible energy contracts are a relatively new product offering that allows customers to pay a flexible unit rate that is directly tied to the wholesale market
Why does the wholesale energy market effect my energy prices?
The state of the wholesale energy market can be thought of as a huge component of supplier costs. If the price is high, then so too will be energy supplier costs. Suppliers will usually pass on the responsibility of covering these higher costs to their customers by raising their prices.
Why does the wholesale energy market keep changing?
The wholesale market is known for being incredibly volatile, with prices being updated every half hour. The wholesale energy market is incredibly exposed to market forces, and price is heavily influenced by many factors.
How can I track the wholesale price of gas?
If you are willing to complete a lot of mental heavy-lifting, then Ofgem is a great source information. By far the most simple tool to track the wholesale price of gas can be located here –intelligence.energybrokers.co.uk