A Guide to Wholesale Energy

Energy costs have been in the spotlight for more than two years now since Russia’s invasion of Ukraine began. This should have acted as a reminder to all of us that depending on other countries for our energy supplies comes at a cost and that this cost is literal. We all heard a lot about ‘wholesale energy’ a couple of years ago, and the subject hasn’t yet completely quietened down again, but what is wholesale energy, and why is the price of it so important? 

What is Wholesale Energy?

Wholesale energy is electricity or gas that is purchased in bulk to resell for profit. Energy suppliers buy wholesale energy from energy producers. They will then add charges to cover the cost of distributing energy elsewhere. Others who may purchase energy wholesale include financial intermediaries, Energy traders and high-volume energy consumers, such as multinational corporations or public bodies.

How Does the Wholesale Energy Market Work?

The wholesale energy market allows suppliers to buy and sell large quantities of energy to and from one another. In today’s market, smaller independent energy producers can also participate. Since energy markets deregulated, end-users have benefited from a more reliable service, more efficient transmission of energy, and better transparency over supplier pricing.

How Wholesale Energy Prices Are Determined

Gas supply and demand play a pivotal role in determining prices. When demand exceeds supply, prices tend to rise, and vice versa. The availability of natural gas from various sources (whether through domestic production, imports, and storage) influences the overall supply and consequently cost. 

The composition of energy generation (coal, gas, renewables) matters a great deal. Renewables have low-to-zero fuel costs, while conventional sources such as gas or coal vary and will fluctuate based on fuel prices. Gas-fired power plants often act as the marginal source of generation, impacting prices during peak demand periods. 

Liquefied Natural Gas (LNG) contracts are also often linked to oil prices. As oil prices fluctuate, so do LNG prices. However, the surge in worldwide LNG production and oversupply has also recently led to lower prices.

Geopolitical tensions, conflicts, sanctions and disruptions to gas supply routes can significantly impact wholesale prices, with gas prices also directly influencing electricity prices. Gas-fired generation often acts as the marginal source during peak demand. More expensive gas-fired plants contribute to the energy mix when demand rises, setting the wholesale power price. Cold weather also increases gas demand for heating, impacting prices in winter, while mild winters reduce gas consumption and lower them.

What is the Difference Between Wholesale and Retail Energy Prices?

Wholesale and retail energy prices tend to differ from each other. Wholesale prices refer to the cost at which energy is traded between suppliers, generators, and large consumers in bulk; they are typically lower because they exclude distribution costs, retail margins, and other consumer-related charges. Wholesale markets operate on short-term contracts and respond to supply, demand, and market dynamics.

On the other hand, Retail Energy Prices are what end consumers pay for electricity or gas.

They include the wholesale cost and additional charges such as transmission, distribution, taxes, and retail margins. They are ordinarily fixed for consumers and cover the entire energy supply chain, from generation to delivery.

How Often Do Wholesale Energy Prices Change?

Wholesale energy prices can change from one second to the next. However, unless a significant spike exists in one of the abovementioned factors, they typically level out. But these have been under pressure in recent years following the pandemic and Russia's invasion of Ukraine caused vast price rises. They've since fallen again, but this demonstrated just how quickly wholesale energy prices can change.

How Do Geopolitical Events Impact Wholesale Energy Prices?

Geopolitical events wield substantial influence over wholesale energy prices. Wars, conflicts, and disruptions in supply chains can send ripples through energy markets. For instance, attacks on the Nord Stream 1 and 2 gas pipelines caused a peak in wholesale gas prices. The Israel-Palestine conflict has also swiftly reverberated through markets, emphasising the vulnerability of energy prices to geopolitical events. 

Current Trends in Wholesale Energy Prices

UK Wholesale Gas Prices surged significantly from the second half of 2021 through much of 2022. This increase includes supply constraints, geopolitical tensions, and rising demand. 

The Energy Price Cap initially protected many consumers, but it increased by 54% in April 2022 and was planned to rise further by 80% in October 2022. However, there has been a recent drop in prices. For instance, between July 2022 and May 2023, wholesale electricity prices fell by 75%.

UK Wholesale Electricity Prices experienced volatility due to extreme weather events and limited coal availability. Average prices at major trading hubs in the United States also rose throughout 20223. The Energy Price Cap level has been reduced, impacting standard variable customers.

Wholesale gas and electricity prices increased rapidly from 2021 through 2022. The Energy Price Guarantee and price cap are crucial in managing consumer costs. European wholesale gas prices fell by 67% in 2023, and the market was quite volatile.

Wholesale Energy in the UK

Wholesale electricity prices in the UK have experienced fluctuations due to various factors.

Wind, solar, and hydro have contributed significantly to electricity generation, while gas-fired power plants also play a crucial role. Wholesale gas prices have also been volatile, with a bearish trend due to increased Norwegian flows and elevated temperatures limiting gas-for-heating demand. Summer 2025 and Winter 2025 gas prices rose, while Summer 2025 power prices fell. 

The ‘Big Six’ suppliers to the UK market are British Gas, EDF Energy, E.ON, Npower, Scottish Power, and SSE. Ofgem monitors and regulates the market. They set quarterly price caps, ensure fair pricing, and support vulnerable customers. At the same time, Major Power Producers (MPPs) generate electricity, including nuclear, coal, gas, and renewables, which now account for a record-high share of electricity generation. Sustainability Initiatives are also important. Meanwhile, the government continues to encourage investment in sustainable energy to reduce emissions and pollution.

The Role of Renewable Energy in Wholesale Markets

The proportion of electricity generated from renewable sources has significantly increased in the UK over the past few decades. In 2000, renewables accounted for only 3% of electricity generation, but by 2022, this share had risen to 42%. Key renewable sources include wind, solar, hydro, and biomass.

Despite this growth, the wholesale price of electricity is still largely influenced by the price of natural gas due to the marginal cost pricing system. This has had surprising effects in the marketplace. The standard economic argument suggests that increasing near-zero marginal cost renewable output should reduce wholesale prices. However, evidence shows that growth in renewable capacity only uniformly decreases wholesale prices. For example, while expansions in solar capacity push prices down during daylight hours, prices tend to increase during non-daylight hours.

The UK electricity market operates through bilateral trades and spot markets. Approximately 40% of electricity is sold on the spot market, where prices are set using the marginal cost pricing system. Unfortunately, this system often ties wholesale prices to the cost of natural gas, even as renewables become more prominent.

Government policy is also essential. Policymakers can incentivise consumers to draw electricity from the grid when demand is low or more renewable energy is available. But more creative thinking is required. For example, creating separate markets for renewable and fossil-fuel-generated electricity could set renewable energy prices independently of gas prices.

Future Outlook for Wholesale Energy Prices

UK Wholesale Gas Prices have been volatile, but some forecasts suggest that a period of relative stability could be upon us. Energy consultancy Cornwall Insight predicts that prices could rise significantly in 2024, while Ofgem has predicted that the fourth-quarter energy price cap (from October to December) might be 12% higher than the July cap. UK Wholesale Electricity Prices hit a record high in 2022 but are projected to decrease steadily, and by 2030, prices could fall under five pence per kilowatt-hour. More stable generation fuel costs contribute to this trend.

Technological innovations also offer scope for greater rationalisation. Digitalisation and Artificial Intelligence (AI) can create smarter, more flexible energy systems. Improved grid management, demand response, and predictive analytics can also optimise energy use, while blockchain technology could revolutionise energy markets by reducing transaction costs, improving efficiency, and increasing transparency.

The policy also matters. Ofgem’s quarterly price cap protects consumers but may need adjustments based on market dynamics while balancing affordability and security, which remains crucial. Continued support for renewables can impact wholesale prices, and incentives for clean energy adoption can drive down costs. We are still in a period of adjusting to a rapidly changing marketplace. 

In this challenging environment, it would be easy to become overwhelmed by the amount of competing factors that can influence energy prices. For your business, SwitchPal can help. We compare multiple trusted UK energy suppliers across the market, ensuring you get the best price for your commercial gas and electricity. In an uncertain marketplace, our expertise can help you negotiate your way through uncertain and volatile times and even towards a more sustainable future.