The energy market involves a lot of moving parts and can be quite difficult to understand. In this blog, we will break down how energy is bought in the UK and the reasons why prices often fluctuate.

The wholesale and retail market makes up the UK’s energy market. Basically, when energy companies buy gas and electricity from generators, they are buying the energy from the wholesale market. They are then able to sell this energy to consumers through the retail market. The wholesale price depends on several factors, which include supply, demand, and global events. In contrast, the retail prices come with extra costs from network fees, taxes and other supplier margins.

Does the wholesale market affect the retail market?

Suppliers tend to buy energy in bulk and in advance to mitigate the risks of when wholesale prices increase. If wholesale prices increase, it directly affects the retail market, causing retail prices to rise pretty quickly too. On the other hand, if wholesale prices drop, it takes longer for customers to see the savings due to their contract type and supplier risk management.

The retail energy market structure

The retail energy market structure can be broken down into three steps. The basic process is as follows:

Energy Generation: In order to sell energy, it needs to be generated first. In the UK, we generate electricity in a couple of different ways, the most common being through fossil fuels and the other through renewable energy. With the push to achieve net zero by 2050, there has been a significant uplift in the production of green energy in the last decade. Currently, renewable energy accounts for 54.4% of the UK’s electricity generation, the highest it’s ever been. With the UK pushing for greener energy, it also comes with the implementation of taxes to fund these projects. Read about the levies attached to your electricity bill here.

Energy Transportation: The next step is to transport the energy through a distribution network so that it can power up your homes and businesses.

Things to note:

  • The National Grid is the electricity and transmission network that transports electricity from power stations across Great Britain to your house and businesses.
  • The Distribution Network Operators (DNOs) are companies that own and operate the electricity cables and maintenance of the network that transports your energy to your buildings. They fix issues like power cuts, provide grid connection and more. For example, if you live in Manchester and you experience a power cut, you would get in contact with SP Electricity North West. There are different DNOs depending on your region, so in the future, if you have a power shortage you know who to get in touch with.
  • Gas has an equivalent system: the national transmission system moves gas around the country, and four Gas Distribution Networks deliver it locally.

Buying your energy: The final step is to buy your energy. Once the suppliers have bought the energy, they can then sell it through the retail market for consumers to buy. The rates will vary depending on your contract type and location.

If you generate your own energy through renewable sources such as solar panels, this could be an effective way to reduce your energy bills. As you no longer solely rely on the grid to power your building. If you have solar panels your excess energy generated can also be sold back into the grid which suppliers will pay for through the Solar Export Guarantee (SEG) scheme.

A Map of Electricity Distribution Networks in the UK

How is energy sold and what costs are included?

When suppliers buy energy at the wholesale rate, several costs get added before it reaches your bill:

  • Wholesale costs, the energy itself, typically the largest slice.
  • Network costs, paid to the transmission and distribution companies for maintaining the wires and pipes.
  • Policy costs, the government levies that fund renewable schemes and social programmes.
  • Operating costs, the supplier's own overheads: billing, metering and customer service.
  • Supplier margin, the profit the supplier aims to make, usually a small percentage of the total.

The final rate is set by the supplier once these costs are added together, and it varies with the type of contract a household or business chooses.

For businesses, this breakdown matters because different contract types treat these costs differently. A fully fixed contract bundles everything into one rate. A pass-through contract fixes the wholesale element but passes network and policy costs through at cost, meaning your rate can move when those charges change.

Who ensures that the energy market is being regulated properly?

There are a few organisations that make sure that the energy market is fair and secure. The Department for Energy Security and Net Zero (DESNZ), the National Energy System Operator (NESO), the Competition and Markets Authority (CMA) and Ofgem who regulates the energy market to protect consumers and support the shift to greener energy.

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