Most of us take it for granted. Light coming on at the flick of a switch. Heat coming from the radiators when we turn on the boiler. And we feel aggrieved when our energy supplier increases what we need to pay for the gas and power.

But what determines the price we end up paying? In this mini-series I will explain some of the dynamics in the energy market.

There are many components that determine the price of gas and electricity for domestic and business customers. First, the cost of gas and electricity on the wholesale market. Then there are many charges that needs to be paid (such as metering, national grid charges, trading platforms, Ofgem charges and more). Thirdly, energy supply companies will need to cover their basic systems and staff costs. And finally, most (although, notably, not all!) companies will need to make a healthy profit to satisfy their shareholders. In this post I will focus on the wholesale price for gas.

The gas we use in our homes comes from a variety of sources – the North Sea (some from UK owned gas exploration sites, and a large volume from Norway). We increasingly rely on gas imports. After Norway, the Netherlands is the second largest exporter to the UK, followed by Qatar (in the form of Liquefied Natural Gas). As a point of interest, only 1% of our gas imports come from Russia and less than 1% of gas in the UK is green.

Energy suppliers, like People’s Energy, buy the gas on the wholesale market. The price we pay depends on how much is available (supply) against the demand. The price traditionally changes with the seasons – higher prices in winter where the demand is higher, and lower in the summer. This year, however, the price has not only stayed at winter level well into the Spring and now Summer months, they have increased.

Some energy suppliers, including People’s Energy, purchase gas ahead of time. We agree a price, months in advance, based on current market conditions, and pay for it at the time of delivery. Companies without a facility to purchase gas ahead are much more vulnerable to fluctuation in energy prices. However, sustained high prices will challenge the budgeting of any suppliers, including those who are able to purchase ahead.

The graph below demonstrates the prices for gas, for purchasing ahead for this coming Winter. The prices would normally have decreased in this period; as the graph shows, they have instead increased from around 52p per therm to 65p+ per therm.

 

There are many reasons for this increase. The main one is that a large gas storage facility called ‘The Rough’ off the Yorkshire coast has had to be shut down due to safety concerns. This means that the UK has become a lot more dependent on energy imports.

So, what does this increase in wholesale price mean? It can lead to two scenarios. Either the price increases or the business operates at a very unsustainable level, which may lead to its closure.

Many suppliers have chosen to increase their price over the past couple of months, and more are following suit. Since April the majority of energy providers has increased its price; British Gas, EDF, EON, Npower, Scottish Power, SSE, OVO, First Utility, Utility Warehouse and Bulb are some of the big names that have increased their tariffs.

Energy suppliers who don’t have the capacity to buy energy ahead will be feeling the heat (excuse the pun) right now – and indeed it wouldn’t be surprising if more small energy suppliers go out of business within the next few months, or certainly in the winter months where prices may go up even further.

Bringing in more customers at pace will also help build up cash reserves and allow us to stay at the lower end of the price range. Therefore, delivering the lowest sustainable price for our customers and business. You can help by asking as many of your contacts as possible to join People’s Energy.

Sustained high gas prices also have a knock-on effect on the price of electricity. More on that in my next blog…