Wholesale energy market
The wholesale energy market is where electricity and natural gas are bought to then be sold in large quantities. Customers purchase energy from suppliers who buy it from this market, meaning that shifts in the environment can alter your energy prices. With the energy market continuing to be a turbulent place due to global external factors, understanding the following terms can be beneficial:
- Market Price: The current cost of energy in the wholesale market, which fluctuates due to supply and demand.
- Hedging: Energy suppliers buy energy in advance (known as hedging) to match the demand of their customers. Similar to that of airlines, who hedge future fuel consumption to avoid spikes in oil prices. Energy hedging can protect suppliers and customers against unexpected price surges.
Supply and Demand
Energy prices are influenced by supply and demand dynamics. Here’s what you need to know:
- Peak Demand: The period when energy consumption is at its highest, typically during the day.
- Base Load: The minimum level of electricity demand, usually met by consistent energy sources.
- Capacity: The maximum amount of electricity that can be produced by a power station, measured in megawatts (MW).
As the UK moves towards cleaner energy sources, small businesses should be aware of these terms:
- Renewable Generation: Energy sources that are naturally replenished over time and will never run out. They produce less greenhouse gas emissions than fossil fuels that can’t be renewed. Examples of renewable generation include solar, wind, and hydro.
- REGOs (Renewable Energy Guarantees of Origin): Ofgem approved scheme to provide transparency to end users about the proportion of electricity that suppliers source from renewable generation. One REGO certificate is issued per megawatt hour (MWh) of eligible renewable output to generators of renewable electricity.
- Net Zero: refers to the balance between the amount of greenhouse gas (GHG) that’s produced and the amount that’s removed from the atmosphere. It can be achieved through a combination of emission reduction and emission removal.
Energy Market Participants
Understanding the key players in the energy market can help you make informed decisions:
- Suppliers: Companies that sell energy to end users.
- Generators: Produce energy including power stations and renewable energy facilities.
- National Grid: System that transmits energy across the UK from generators and power stations.
- Grid Operator: Responsible for managing and balancing the electricity grid.
- Distribution: Final phase of delivering energy to the end user after generation and transmission.
- Fixed Rate Energy Tariff: this contract type locks your energy price for a specified period, usually ranging from 1-5 years, depending on the supplier product offering. This helps businesses protect themselves from market price fluctuations and control cashflow more predictably.
- Standard Variable Energy Tariff: variable energy contracts can rise and fall in cost each month depending on the market, this option offers flexibility without committing to a long-term contract but is often less cost-effective.
- Standing Charge: this is a fixed daily fee that you pay each day, covering the costs of supplying energy such as metering.
- Unit Rate: this is the actual rate paid for the consumption of energy measured in kilowatt hours (kWh). These will vary by meter type and region.
- Climate Change Levy (CCL): a government-imposed tax to encourage reduction in gas emissions and greater efficiency of energy used for business or non-domestic purposes.
The UK energy market is regulated to ensure fair practices and consumer protection. Alongside the government, some of the key players and terms include:
- Ofgem: The Office of Gas and Electricity Markets, the regulator for the electricity and gas markets in the UK.
- DESNZ (Department for Energy Security and Net Zero): Department of the UK Government that oversees all matters energy and net zero related. Formely know as Business, Energy and Industrial Strategy (BEIS).
Understanding wholesale energy market jargon is essential for small businesses in the UK looking to make informed decisions about their energy purchases. By familiarising yourself with these key terms, you can navigate the energy market with confidence and awareness of what impacts your bill, the market environment, and the tariffs you choose. Remember that the energy market is constantly changing and staying up to date is vital to potentially lower costs and work towards a more sustainable generation.