Energy price watch: the wholesale market and your bill | Blog

Wholesale energy costs continued to fall through the second half of 2019 and into 2020, especially the cost of gas. Meanwhile, network and policy costs for electricity are going up. We’ll be dropping gas prices soon, so members should keep a look out for our next update.

We’re sorry it’s been a while since our last update. Quite a bit has changed in the energy market and we’ll be taking a close look at what’s been going on in this post.

We’re lowering gas prices soon

Since we last updated you, the wholesale cost of gas has fallen significantly. You might read about this in the news today as Ofgem, the energy regulator, is planning to lower the cost of the energy price cap in April in response to these lower wholesale costs. Our tariff is already £179 or 15% below the price cap for an average UK home, but we’ll still be passing on a further cut to our gas prices soon. For now, we don’t plan to change our electricity prices because our prices are already low, and the drop in electricity wholesale costs has been offset by increases in other network and policy costs.

Wholesale costs down, other costs up

Your annual energy bill is made up of a number of different costs. Wholesale costs are a chunky part of that – about 38% – but other costs are important too. For example, network and policy costs represent around 35% of your bill. Here’s the breakdown for an average dual fuel bill:

A chart showing the breakdown of an energy bill for the average home
Source: Ofgem. Notes: An estimate of the different costs that make up an average dual fuel bill for a typical domestic customer.

When we last updated you in the Summer, the energy market had been volatile. Wholesale costs had been falling, but we had also seen a number of spikes in market prices. From September 2019, these costs have been falling in a more orderly way. Wholesale gas costs are now around 18% lower than they were in June. Electricity costs are down 16% too.

A graph showing the annual bill at Bulb vs the wholesale cost of energy
Note: Annual cost for an Ofgem medium energy user on a standard dual-fuel tariff in the London region. Source: Bulb data.

While wholesale electricity costs are falling, network and policy costs are going up. Network costs are the charges that Bulb pays to move electricity up and down the country on the National grid and local distribution networks. These costs have seen a small increase this year. Bulb’s contribution to environmental and social policies like the Contracts for Difference scheme (CFD) and Energy Company Obligation (ECO) are also increasing.

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A chart showing the change in electricity network and policy costs from 19/20 to 20/21
Source: Bulb data. Notes: Increase in costs for an average home with typical electricity use (3,100 kWh per year).

What’s causing changes to the cost of energy?

Briefly

  • Wholesale gas costs are 18% lower than they were in June 2019

  • High gas storage stocks have continued to drive prices down

  • Russia and Ukraine reached a deal in December allowing the gas pipeline into Europe to remain open

  • Wholesale electricity costs are 16% lower than they were in June 2019

  • Safety concerns about a number of French nuclear reactors meant several were shut for maintenance, preventing electricity prices from falling as much as gas prices

  • Electricity network and policy costs are 13% higher for 20/21 than they were for 19/20

  • Distribution and transmission charges are going up, alongside increased costs for environmental policies and the Capacity Market

In detail

Gas

Wholesale gas costs have dropped by around 18% since June.

Since the end of Autumn, gas storage facilities in Europe have been full. Mild Autumn weather in Asia kept shipments of Liquified Natural Gas (LNG) coming to Europe. Despite cold weather in November and early December, particularly in the UK, gas prices fell due to continued high imports of LNG. Since mid-December it has generally been mild, wet and windy, which are typically conditions for maintaining low wholesale costs. The gas transit contract between Russia and Ukraine, which was due to come to an end on 1st January 2020, was also resolved through last-ditch talks in December. This means gas can continue to travel into Europe from Russia, via Ukraine. When this was announced gas prices fell further.

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In January, the increased tension between Iran and the USA following the death of Qasem Soleimani caused a short term spike of 8% in the wholesale cost of gas. But as the political situation eased, prices settled. At Bulb, we buy our energy three months in advance so we are protected from short term price spikes like this. Quite a bit of LNG travels to Europe and the UK from Qatar via the Strait of Hormuz, so the political situation in Iran could pose a risk to wholesale gas costs if it were to escalate.

Electricity

Wholesale electricity costs have followed the pattern in gas but not as much. They’re
now around 16% lower than they were in June. Safety concerns about some nuclear plants in France prevented the wholesale cost of electricity from decreasing as significantly as gas. The UK exports electricity to France at peak periods so when the French nuclear reactors aren’t in use, the UK needs to export more to meet French demand, pushing wholesale electricity prices up.

Meanwhile, the cost of supplying electricity is going up. In April, the cost of distributing and transmitting electricity through the National Grid and local transporters is due to go up about 3% for Bulb. These extra funds will pay for maintenance and expansion of the network. Other subsidies, which are paid for through your energy bill, are also due to go up in April. Suppliers like Bulb will contribute more to the Contracts for Difference scheme (CFD) and the Energy Company’s Obligation (ECO).

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How does this affect your bill?

We’re planning to lower our gas prices and will be in touch with members soon to let them know what this means for them.

A change to poor service compensation

Since January 2018, we’ve automatically given compensation to members who receive poor service from Bulb. In October, we updated the compensation amount so that if we take longer than 5 minutes to answer a phone call, or 5 days to answer an email, we’ll automatically add £5 credit to your account. We email any member who experiences poor service to let them know we’ve done that.

Why do wholesale prices affect Bulb?

We always supply 100% renewable electricity and 100% carbon neutral gas. However, renewable generators will sell to whoever is prepared to pay for their energy (and rightly so!). This means that when fossil fuel prices go up, renewable prices go up too.


As always, we’d love to hear any thoughts or questions you have on this. Reach us at hello@bulb.co.uk or drop in on the Bulb Community.

Amit Gudka

Amit is the Co-founder and COO of Bulb. He writes about the wholesale energy market and how it affects your energy bill.


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