Wholesale gas prices affect how much we pay for our gas and electricity.
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We take our energy for granted. When we flick the switch we expect the lights to go on, when we turn the heating on we wait for the room to heat up. But the energy flowing through our pipes, and in turn the price we pay to our suppliers, is determined by the broader wholesale gas market.
uSwitch explains when wholesale gas costs will change and how it will affect your energy bills.
What are wholesale gas prices?
Wholesale gas prices are the price that energy suppliers pay to buy the gas that they then sell to us. 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 they will use. If they don't buy enough they will have to buy more later on at a higher price.
The cost of wholesale gas makes up the majority of our energy bills - 45% of the average energy bill is made up of the cost of wholesale gas, supply costs and profit margins.
The wholesale gas prices paid by energy suppliers affect the cost of household gas. If the cost of wholesale gas rises or falls for a continued period, it is usually passed on to customers.
Wholesale gas not only provides the gas which we use in our homes, but it is also burnt to generate up to 30% of our electricity.
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Where does wholesale gas come from?
The UK has its own domestic gas supply in 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 find other sources elsewhere in Europe.
The government and suppliers are also working together to find other, more environmentally friendly sources of energy.
What factors affect wholesale gas prices?
The price of wholesale gas changes frequently, often on a daily basis. The price your energy supplier pays is based a complex combination of factors such as supply, demand and storage.
For example, in the winter, more households put their heating on, which means there is a greater demand on the oil resources, and this pushes up prices.
In order that our household energy costs don't fluctuate on a daily basis, energy companies buy their energy well in advance.
As your energy supplier would have bought the majority of its wholesale gas sometimes years in advance, the cost of your domestic energy prices will not immediately be affected by external costs.
This enables the energy supplier to have more control over the impact of outside factors on domestic prices.
Other factors that may affect the cost of wholesale gas include:
Cold weather Your supplier will pay different prices according to the delivery prices. However, if there is a particularly cold spell, there will be a higher demand for energy.
Increased demand means that gas is taken from storage, which is a more expensive source of gas. This is why particularly harsh winters which produce unexpectedly high levels of demand for gas often prompt a rise in household gas price.
Oil and gas business contracts are often combined. This means that if the cost of oil goes up, it often 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 therefore the prices we 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 bet on how they think the market may change, and what demand will be.
Are suppliers required to pass on savings when the cost of wholesale gas decreases?
The energy industry regulator, Ofgem does not set energy prices and therefore cannot force energy suppliers to pass on any savings they make when the cost of wholesale gas decreases.
It is up to energy suppliers to assess the conditions of the market and pass on price changes accordingly.
However, if Ofgem feel that an energy supplier is behaving improperly, it is free to launch an investigation into the company's practices.
How is the price of wholesale gas and oil related?
The price of wholesale gas is often related to the cost of oil. This is particularly true in Europe where energy suppliers link oil prices to gas prices in their long term supply contracts.
Ofgem estimates that the link between oil and gas prices is responsible for around 30% of changes in future gas prices.
If the price of wholesale gas changes, when can I expect to see a change in my gas bill?
Each supplier chooses when it wishes to increase prices and by how much. Therefore the changes in your energy bills are dependent on your supplier.
Under an Ofgem ruling, suppliers are required to give their customers at least 30 days' notice by writing if they are going to change their prices.
This gives you enough notice to decide whether you want to accept the price increase or decrease, or instead will reject the price rise and switch to a cheaper supplier.