The wholesale electricity market

The wholesale electricity market is where electricity is traded between generators and suppliers.

The wholesale electricity market in a nutshell

  • The wholesale electricity market is where suppliers purchase electricity from generators.
  • Wholesale electricity market prices hover between £40 and £50/MWh.
  • They make up almost 60% of domestic electricity bills.
  • Wholesale electricity costs are set to decrease over the next seven years.

How the wholesale electricity market works

Here is a brief description of how the wholesale electricity market operates.

Who trades on the wholesale electricity market?

  • Electricity suppliers buy electricity on the wholesale market to supply it to their customers. Suppliers can also sell electricity if they have bought more than is necessary or to fight price volatility.
  • Electricity generators sell the electricity their power plants have produced on the wholesale market. Generators can also buy electricity if they have not produced enough to meet demand.
  • Some customers, usually large/industrial, purchase their electricity on the wholesale market but this is a recent phenomenon.
  • Traders buy and sell electricity on the wholesale market to ensure their customers get the best prices.

How is electricity traded on the wholesale market?

Bilateral trading

Bilateral electricity trading refers to contracts between generators and suppliers for the purchase of electricity. Usually, bilateral trading of electricity is framed by some sort of master contract for a set period that establishes overarching trading conditions. Individual trading contracts then set the amounts of electricity to be traded and the trading price. To avoid market imbalances, generators inform the system operator (National Grid) of the volume of electricity traded before delivery.

Market trading

Electricity supply and demand is mostly matched on two exchanges when it comes to electricity delivered on the same day or the next day (the spot market): APX and N2EX. In this case, an auction process matches offers from generators (certain quantities of electricity at a certain price) and bids from suppliers or large consumers (expected consumption). Once more, avoiding market imbalances and grid capacity requires the network operator (National Grid) to be aware of traded volumes of electricity.

Long-term trading

Long-term trading of electricity mostly happens through electricity brokers. There are nine members of the London Energy Brokers’ Association: BGC Partners, Evolution Markets Ltd, GFI Group Inc, ICAP plc, Marex Spectron Group Ltd, PVM Oil Associates, Tradition Financial Services Ltd, Tullett Prebon Inc, Griffin Markets Limited). Long-term electricity trading prices are established less according to supply and demand than forecast market development: availability and cost of supply, forecast demand, etc.

Wholesale electricity market prices

Wholesale prices as a component of electricity bills

Wholesale electricity prices, with supply costs and supplier margins, make up 58% of the average UK domestic electricity bill. It is the single highest component of what customers end up paying for electricity, ahead of distribution and transmission charges, environmental charges or VAT.


Average wholesale prices for each transaction type

Depending on when electricity is bought or sold on the wholesale market (for the next season, for the month ahead or for the next day), average wholesale prices vary. Here are last year’s average prices.

Transaction type

Period

Average price (GBP/MWh)

Season ahead

Winter 2013

54.33

Month ahead

2013

50.52

Day ahead

2013

50.08

Sources: Energy UK, LEBA, APX and N2EX.

Wholesale electricity spot price trends

Wholesale price trends over a year

Over a single year, the electricity wholesale price tends to follow expected demand, with prices rising in winter and dropping in summer. Here are 2013 APX spot prices to illustrate.


Wholesale price trends and forecast

Wholesale electricity costs have risen steadily since 2007, with prices peaking briefly in mid-2008, as shown in the following graph from Consumer Futures. Interestingly, the 2008 wholesale price hike led to a general retail price increase from then on: retail electricity prices did not match wholesale electricity drop in their relative drop.

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How is electricity bought and sold on the UK spot market? What are recent and forecast spot price trends? Find out!