Most of know that wholesale gas prices affect how much we pay for our gas — but how and why is a bit more complicated.
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uSwitch explains what factors impact wholesale gas costs, and how those end up impacting your energy bills.
What are wholesale gas prices?
Wholesale gas prices are the rates that energy suppliers pay to buy the gas in bulk, and then turn around to sell to customers.
Crucially, wholesale gas has to be bought far in advance, meaning energy companies have to estimate how many customers they will have, and how much those customers are likely to use. If the supplier doesn't buy enough, they will have to buy more later on at a higher price.
According to Ofgem, wholesale costs make up 38% — the majority — of the average household's dual fuel energy bill (the rest being made up of network costs, VAT and operating costs, among others).
So, if the cost of wholesale gas rises or falls for a continued period, it is usually passed on to customers.
Where does wholesale gas come from?
According to DECC, the UK produces 45% of its own wholesale gas from the North Sea, where it has traditionally sourced its natural gas.
However, the North Sea supplies are depleting at faster rate than predicted, which has prompted energy companies to tap into European pipelines, which are fed from Norway (21%) and Russia (35%).
The government and suppliers are also working together to find other, more environmentally friendly sources of energy that are renewable.
Factors that may affect the cost of wholesale gas
- Cold weather If there is a particularly cold spell, there will be a higher demand for energy, which will drive prices up. Increased demand also means that gas is taken from storage, which is a more expensive source of gas.
- Oil costs Oil and gas business contracts are often combined. This means that if the cost of oil goes up, it can affects the cost of gas. Oil is sourced from around the world, so worldwide events will impact its cost.
- Infrastructure Planned and unplanned maintenance to equipment has an effect on your gas and electricity prices. If, for example, a pipeline is in need of urgent repairing, it may be taken out of service, impacting production and ultimately the prices consumers pay.
- Trade Because energy suppliers buy their energy in advance, there is an element of risk in how much they buy and how much they pay. Energy traders essentially make a bet on how they think the market may change, and what demand will be.
How does all this ultimately impact my energy bill?
Each supplier chooses when it wants to change your prices, and by how much — however, suppliers typically follow each others' leads, meaning if one major supplier raises prices one year, the others will as well.
Supplier often cite rising wholesale energy costs for hiking customers' prices, but have come under fire for not dropping prices in line with lowered wholesale costs. Your energy bill will only be affected by price changes if you are not on a fixed rate energy deal.
If your supplier has announced a price rise and you are affected, run an energy comparison straight away to see if you can save by switching supplier. It's free to switch and sites like uSwitch are Ofgem-accredited.