Energy Insights

 / Market update

Market update

23 Sep 2021

|10 minutes

Read our guide where we explore the state of the wholesale energy market and the reasons behind the recent price increase.

A guide to wholesale energy costs and volatility in the market

With the price of wholesale energy tripling since July last year, it’s no surprise that the continued volatility in the market is making headlines.

In this guide, we explore the state of the wholesale energy market and the reasons behind the recent price increase.

Why are wholesale prices so important?

The wholesale market is where energy suppliers, like us, buy the energy that they supply to their customers. The cost of buying wholesale energy makes up the largest part of the typical business and household energy bill (around 40%). This means that when the markets change significantly, prices are affected too.

Why are wholesale energy prices increasing?

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 due to unseasonably cold temperatures. 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.

  • 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. There is also high demand for gas across Europe so while all of Europe is experiencing the same shortage, prices rise.

  • 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?

Most homes and many businesses still rely heavily on gas, particularly in the paper, metals and chemicals manufacturing sectors as well as within the food processing industry. 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.

Some residential and small business 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. 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.

Will Shell Energy be affected by the recent market movements?

Shell Energy is part of Shell, a global business in operation since 1897, with approximately 86,000 employees in more than 70 countries.

“Shell Energy is an established supplier in the UK business and household energy market, with the backing of one of the largest energy companies in the world. We are an established business that is here to stay, we can provide businesses and households confidence that we are able to support their needs throughout this uncertain time.”

- Paul Hellings, CEO at Shell Energy UK Limited.

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