Most of us understand that wholesale gas prices can affect how much we pay for our gas. In this guide, we explain how and why wholesale gas prices can be a bit more complicated than that.
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We explain what factors impact cost's and the wholesale price of gas, 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 largest proportion — 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 for a continued period, it is usually passed on to customers. If wholesale gas prices fall, you may occasionally see prices drop, but you're more likely to see it stay around the same level unless you switch to a new fixed rate tariff.
Where does wholesale gas come from?
According to BEIS (formerly known as 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 a much faster rate than predicted, which has prompted energy companies to tap into European pipelines, which are fed from Norway (21%) and Russia (35%).
This has also led to a rise in fracking, otherwise known as hydraulic fracturing, which involves a high-pressure injection of liquid into the earth to help extract gas from subterranean rocks. The practice is controversial, receiving criticism for causing tremors in the earth and being dangerous to nearby communities and the environment.
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
There are a number of factors that could impact the cost of wholesale gas, and therefore affect the price you pay when it is delivered to your home by your energy supplier.
- Cold weather
If there is a particularly cold spell during the year, there will almost always be a higher demand for energy to go towards heating, which will drive wholesale gas 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 affect the cost of wholesale gas. Oil is sourced from around the world; so worldwide events will impact its cost. For example, in oil-rich countries, war and conflicts can have a major impact on the price of oil because the supplies are at risk or harder to get hold of. Similarly, natural disasters in countries known to supply oil can cause market prices to increase.
Planned and unplanned maintenance to equipment that helps deliver the gas to your home has an effect on wholesale gas prices and therefore the price when it comes to you. 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.
Due to the fact that 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. Energy traders could bet on the wrong outcome and cause prices to rise.
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.
Suppliers are also competing against each other for your custom, so by comparing your gas supplier against other tariffs and switching over to a better deal, you can help keep the industry much more competitive. Energy suppliers will want to avoid price rises if they think their customers are likely to switch to a competitor.
On the other hand, suppliers have often cited rising wholesale energy costs for hiking customers' prices, but they have also come under fire for not dropping prices when wholesale gas prices have come down.
Energy price cap?
An energy price cap on standard variable rate tariffs is due to come in around December 2018, and will put a maximum limit on the amount suppliers can charge per unit for energy.
However, the methodology used to calculate what the price cap should be factors in wholesale gas prices and potential overheads for suppliers. The price cap will also be temporary so if wholesale gas prices rise significantly, then it's likely that the price cap will be adjusted or removed altogether.
If you are on a standard variable rate tariff with your gas supplier, then your bill will be more expensive soon after a rise in wholesale gas prices. In fact, standard variable tariffs are usually the most expensive tariffs available. Suppliers automatically put customers onto a standard variable tariff when they move home or once their current fixed rate deal has come to an end.
Your energy bill will not be affected by wholesale gas price changes if you switch to a fixed rate tariff.
If your supplier has announced a price rise and you are affected, run an energy comparison today to see if you can save by comparing switching your energy supplier. It's free to switch and sites like uSwitch are Ofgem accredited.
Your energy bill will only be affected by price changes if you are if you are not on a fixed rate energy deal.
Ofgem, the energy regulator, has also stated that customers might be able to save up to £300 on their annual energy bill by switching. To find out more about Ofgem - The energy market regulator read our guide.