Wholesale energy prices explained: Why our rates are changing
By: Shell Energy
20 Sep 2021
Last updated: 7 October 2021
This increase is also why Ofgem (the government’s energy industry regulator) recently raised the energy price cap to fairly reflect the underlying cost of supplying gas and electricity to Britain’s homes. The price cap, which came into effect on Friday 1 October, means that customers on a flexible tariff should expect to see a change in their energy bills.
In this guide, we explore the state of the wholesale energy market and the reasons behind the price increase, the implications of the price cap and how all of this affects Shell Energy customers.
Why are wholesale prices so important?
The wholesale market is where suppliers, like us, buy the energy that we supply to our customers. The cost of buying wholesale energy makes up the largest part of the typical household energy bill (around 40%). This means that when the markets change significantly, our prices need to adjust as well.
Although we work hard to keep our costs low so that we can absorb as much of these costs as possible, unfortunately, the latest increase in wholesale costs has been so significant, we’ve had to increase our rates.
Depending on your chosen tariff, these changes may affect you. Read on to find out more.
Why have wholesale energy prices increased so much?
The increase in wholesale electricity prices is due to rising gas prices, which have soared in the past year. And there have been a number of contributing factors here:
- British and European gas storage levels are at a record low level due to higher usage in the first half of the year. Gas storage levels approaching winter are an important indicator of the expected delivery price for gas at times when daily production is not enough to meet demand during the coldest months. The UK also sometimes receives deliveries of LNG (liquefied natural gas) tankers from places like Asia and the US, but gas prices in Asia are also high so much of the supply is being used there.
- We’ve experienced unseasonably cold temperatures in the UK this year so gas usage was higher than usual. Generally the gas storage replenishment season starts in April, but a cold April and May this year depleted European gas reserves more than usual. With only the rest of September as the traditional gas replenishment season left, EU storage sites are around 20% lower than would normally be seen for this time of year.
- European pipeline deliveries have reduced year on year, which has caused prices to rise. A large proportion of the gas is delivered through pipelines that come through Europe and there is high demand for gas across the continent.
- Low wind generation across Europe in 2021 has driven demand from gas-burning electricity-generating power stations. With the price of CO2 emissions doubling since last year, this has also had a knock on effect of making gas burning rather than coal burning more appealing for power generation. Using gas reserves to generate power has exacerbated the demand for gas.
Do these increases apply to renewable energy too?
Many UK homes still rely on gas for heating, and a fairly high percentage of the UK’s electricity still comes from burning gas too (around 40%).
At Shell Energy, all of our electricity comes from 100% renewable sources like wind, solar and biomass. Our renewable electricity is certified by Renewable Energy Guarantees of Origin (REGOs), which means that all of the electricity you buy from us is matched with the equivalent amount of units from 100% renewable sources in the UK.
But when there is a high demand for gas, and gas prices rise, the cost of buying electricity from all different generation sources (including renewable) increases too.
This further emphasises the importance of the transition to net-zero carbon dioxide emissions and a change in how Britain’s homes are heated and powered. As we move towards low-carbon heating solutions in UK homes and generate more electricity from renewable sources, the UK will become less reliant on gas and less vulnerable to changes in gas prices.
How does the price cap work?
Ofgem reviews the price cap every six months to make sure that the price you pay your energy supplier is a fair reflection of the actual cost of providing you with that energy. The cost of providing your energy is made up of many different factors, including wholesale costs, policy costs and network costs.
So if those costs go up as a whole, the price cap goes up with it. The price cap comes down if costs as a whole decrease.
Am I affected by the price cap increase?
Flexible tariff customers
If you’re on a flexible tariff, the price cap increase will affect you. You’ll have received an email or letter to let you know how your bills have changed.
In a typical household, credit customers will pay £139 (excl VAT) more on their annual energy bill, while prepayment customers will see an increase of £153 (excl VAT) per year.Our tariffs offer 100% renewable electricity as standard, and whatever the level of the price cap, that won’t change.
Fixed tariff customers
Being on a fixed tariff can provide protection from price rises in the energy market.
As you’re on a fixed energy tariff that’s set for a defined period, you won’t see any change in the amount you pay for your energy within your contract term and therefore won’t be impacted by the price cap increase in October.
If you're on a fixed tariff that’s coming up for renewal, you’ll be moved to a flexible tariff (also known as a standard variable tariff or SVT) at the end of your contract period.
You'll have the opportunity to switch to a fixed tariff when one becomes available via My Account.
Why are fixed tariffs currently priced higher than the price cap?
The energy price cap is calculated by tracking wholesale energy costs over a six month period, the last one being between February and August this year. Since the end of that period, wholesale prices have continued to soar, now some 50% higher than a month ago.
This means that when we buy the energy for a customer signing up to a fixed-price tariff, it costs significantly more than the price cap to buy the energy needed to honour that contract.
When did the price cap changes take effect?
The price cap came into place on Friday 1 October.
The next review of the price cap will likely happen in April 2022. Prices may drop, or then again, they might rise. Since the last time the cap was set, wholesale prices have continued to increase but we can’t predict what will happen in the coming months.
Some suppliers are going out of business, why is that?
When a customer joins us, we buy energy up front for the length of that tariff - either 1, 2 or 3 years in advance. It means that if energy prices fluctuate, we’ve locked in an agreement on how much we’ll buy it for and how much our customers will pay for it. If suppliers haven’t done that then big increases in wholesale prices can put a strain on their finances.
We're here to stay for the long term
Shell Energy is a well backed business, with experienced leadership and a strategy that plans for the long term with the necessary provisions to ride this wave, so our customers and colleagues can rest assured.
“Shell Energy has backing from Shell, and therefore here to stay as a long term and enduring UK energy provider. We are actively participating in the UK’s transition to net-zero emissions and guiding British households to a better energy future.”
Chief Executive Officer, Shell Energy
We’re here to help
We recognise that this news will put many households in a difficult financial situation, especially as furlough schemes are removed and we move into winter.
We’re fully invested in Ofgem’s voluntary scheme to provide additional support to customers who may struggle to pay their bills this winter and encourage them to get in touch with us so we can discuss ways to help.
You can find out more about your options here.
At Shell Energy, we’re also actively helping to contribute to industry discussions with Ofgem and the Department for Business, Energy and Industrial Strategy (BEIS) about the broader issues facing the energy industry right now, to first and foremost do what we can to protect customers impacted by other suppliers going out of business.
Get in touch with our team:
- Read our online Energy Market Frequently Asked Questions
- Read our online Price Cap Frequently Asked Questions
- Chat to us via Ask Us, available 24 hours a day
To find out more about how the price cap works and how it’s determined, the Ofgem website has loads of information.