The Electricity Wholesale Market In The UK: Understanding How It Works  | February 2024

The Electricity Wholesale Market in the UK: Understanding How It Works 

The wholesale market in the UK acts the same as any other wholesale company would. As providers for the rest of the market, wholesalers are tasked with being a main supplier to everyone else. 

However, since the electricity market is always affected by numerous external factors, the price tariffs change constantly due to inflations. This can lead retailers and consumers to look for other ways to get their energy supply.  

To know more about the prices of the electricity wholesale market uk you can simply read more about it. 

What is the National Grid?

This is Great Britain’s operating system which supplies gas and electricity. It works as a network and operates by supplying the country with gas and electricity while managing the supplies and providing for the demand so that users can always access gas and electricity. 

The grid operates with two networks; this is known as transmission and distribution. The transmission network is responsible for transporting electricity in large volumes and voltage. From the transmission network, the energy moves over into the distribution networks, which then decreases the volume and voltage for the supply directly into homes and businesses. 

Ofgem and its role in UK’s Wholesale Market 

Ofgem (Office of Gas and Electricity Markets) regulates Great Britain’s electricity and gas supply. 

This regulator provides licences for all energy suppliers and serves as a protector for consumers when it comes to regulating prices. 

Different Markets that Operate in the Electrical System  

The different markets are as follows: 

  • Wholesale markets: These markets buy and sell electricity to suppliers and generators 
  • Retail electricity markets: Sells electricity directly to consumers. 
  • The balancing mechanism market: Balances how the supply and demand works in real-time.
  • Balance services market: Ensures the security and quality of electrical supply of the transmission networks. 

The balancing mechanism involves both suppliers and generators. Generators use the balancing mechanism to submit their bids or offers, which is the amount of electricity and the price they are selling it at. 

Bids refers to increasing demand or reducing the generation of electricity, whereas an offer is to increase generation and reduce demand. 

Since generators input their data into the balancing mechanism 24/7, there are half-hour windows called settlement periods. This data is reviewed, and once the lowest price is offered, it is then accepted. 

Merit order is a system of low-cost preference. This allows which generators will be brought onto the system. 

The balancing service market includes: 

  • Reactive power: This ensures that the voltage levels remain in the same given range. 
  • System Restoration: This is needed to restart the process if there should be a shutdown of the national electricity transmission system. 
  • Frequency Response: Frequency control systems have to be kept at 50Hz. 
  • Reserve: These are the additional power sources that are kept on reserve for when needed. 

Elements that affect the Production and Sale of Electricity 

Here are the most important elements that ensure the supply of electricity. 

  • Electricity generation 

The UK has always generated their own electricity by using fossil fuels and have later started using other approaches such as using renewable energy such as wind or solar resources. 

They have also expanded to nuclear power and started importing electricity resources from other countries. 

  • Using distribution networks as transport method for electricity 

The national grid is responsible for the distribution of electricity throughout the country. 

  • Selling electricity to consumers 

Wholesale markets purchase electricity from electricity generators, then sell them to energy providers. 

How the Wholesale Market in the UK Works 

Wholesale markets purchase energy from the power plants who produce electricity and then they sell those to suppliers who provide businesses and homes with energy. 

Not all energy supply is bought from retailers, sometimes businesses can purchase energy directly from the wholesale markets, even the generators (power plants) if they haven’t produced enough energy supply can purchase from the wholesale markets. 

Different Trading Done on the Wholesale Market 

The contract between the suppliers and the generators of energy is known as a bilateral trading, this means that suppliers decide how much electricity that they want and their price. To help regulate the price, energy suppliers send information to the National Grid. 

Market trading looks at the supply and demand. It matches them by looking for whether the energy will be delivered the same day or the next day to avoid any imbalances to the National Grid and to be able to cater for the grid’s capacity. 

Long-term trading will result in using energy brokers to supply the resource. The price range for this type of trading is set by the developments within the wholesale market and not by the supply or demand of the resource. 

Price Tariffs for Electricity

Two types of tariffs can be chosen from, variable and fixed rate. Variable rate is when you pay for every unit of energy that you have used and this price can differ greatly each time depending on the supplier rates. The variable rate is also known as a default rate and this is usually the standard rate that most businesses are on until they switch over to a fixed rate. 

Fixed rate tariff is a price paid for a long-term period, usually 12 months. 

What affects the price of electricity? 

On average a wholesale price is a third of the energy bill. The price is determined by external factors such as energy supply and demand and the cost it takes to make electricity. However, suppliers can negotiate cheaper rates for the consumers if they buy in advance. 

There is also other external factors that affect the price of electricity, these include: 

  • Government policies 
  • Taxes 
  • Competition among energy suppliers 
  • Transport of electricity 
  • Maintenance of supply 

There are also the energy price caps which help consumers by setting limits to the price per hour per kilowatt a supplier can charge. 

These price caps are set twice a year, in April and in October, it is only done temporarily by Ofgem to help consumers save on the amount of money they are spending on electricity. 

Another thing to note is that there are no price caps on fixed-term tariffs as these are already determined to save on costs. 

Main Energy Suppliers in the UK 

These 6 energy suppliers are the UK’s main suppliers despite over 60 electricity suppliers. If you are looking to get your electricity from one of the following, you can look for: 

  • Scottish Power (Iberdrola, a Spanish energy firm owns this company) 
  • E.ON (German Energy firm, E.ON SE owns this company)
  • EDF (French-State owned energy firm) 
  • OVO (privately owned) 
  • nPower (German Energy firm RWF owns this company) 
  • Centrica (Owns British Gas) 

These top 6 supply more than three-quarters of the country’s energy supply, however other energy suppliers also have a large clientele. 

Conclusion    

The UK wholesale market has the most responsibility of providing electricity to generators, suppliers (retailers) and directly to consumers. 

Once you understand how the process of buying and selling electricity works, you can decide to either pay for it at wholesale price or pay extra from suppliers. 

Find an energy supplier that meets your energy needs and saves you money. 

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Disclaimer: Please be aware that this site is no longer under active management. As a result, we cannot assure the accuracy or relevance of the content provided. Visitors should use their discretion and consider the potential for outdated or inaccurate information before relying on any material found here.