UK Business Energy Market

Energy Pricing

In this country, our energy price per unit (per kWh) is connected (or pegged) to the wholesale price of gas. That is, the cost energy suppliers pay for the energy they resell to consumers is charged at the maximum cost per unit, which is Gas, and not the current wholesale gas price, but a fictional value based on the past prices. This is despite the fact that the amount of power generated from Gas is only 32%. That means that three quarters of total energy production in this country costs considerably less per unit.

How can this be?

The UK energy market operates on a marginal pricing system. That means that the price of electricity is set by the most expensive source needed to meet demand at ANY given time. Gas power stations, which provide a third of power in the summer, and two thirds in the winter, set the electricity wholesale price in the market.

Gas wholesale prices have been volatile, seeing record prices in 2022 and there will always be 'gas' generation even if we do not directly need it, simply because it keeps the wholesale rate high in the current pricing structure.

Generation Companies

The generation companies are responsible for generating electricity in the UK, and as we can see, being able to charge the maximum for energy that costs them far less has lead to significant profits, whilst the energy suppliers are struggling, and businesses are being nailed.

Company	2022	2023	Change
EDF	£1.1b	£3.4b	+209.09%
SSE	£4.4b	£2.4b	-45.45%
Drax	£731m	£1.2b	+64.16%
Centrica	£72m	£750m	+941.67%
Scottish Power	£1.5b	£1.1b	-26.67%

Its worth mentioning, purely from an ecological point of view that Drax, whilst one of the largest generators in the country, do so using biomass, which is typically wood pellets, straw and corn stalks, organic waste, etc and has questionable sustainability. Burning anything has questionable sustainability, but wood and waste, what do you think?

EDF have achieved their staggering profit increase primarily due to the marginal pricing system, for EDF who mainly produce power through solar, wind and nuclear, they can charge the same price as Gas. Considering that the sun and wind cost nothing past the installation and some residual maintenance, its not hard to see where this profit is coming from.

SSE had an overall reduction in profits to a mear £2.4 billion, but their renewables business increased from £561m to £833m in 2023/2024.

Scottish Power saw a reduction in profits to £1.1 billion, and this was primary due to their use of natural gas and the volatility of the wholesale price.

Resellers

In this country, you cannot buy power from the Generators, instead having to pay an intermediary. These intermediary's buy power at a wholesale rate, then invoice customers are a retail rate. The difference is profit. The insane requirement for these intermediary's is because the generating companies are PAID at the end of each day for the power they produce. Let me say that again, the Generation companies, are paid at the end of every day for the power they generate, which was written into legislation when the industry was privatised. The generation companies cannot reasonably expect consumers to pay them at the end of each day, every day for the power they use, so instead, an intermediary is required, legislation enacted, and licenses granted.

These 'resellers' buy power daily from the generators, and invoice the consumers in arrears. They are effectively carrying the cost of power used, recovering it in arrears, and the rates they charge are of course higher so they can make a profit for this service.

Since the wholesale price of electricity varies day to day, yet the price the consumer pays for electricity is fairly fixed, these resellers make a widely varying profit, and indeed when the wholesale price exploded in '22, some resellers went out of business simply because their retail rates were insufficient to cover the daily price they were paying the generators.

Considerations

In 2022/2023 OFGEM the energy regulator adjusted the price cap to allow energy suppliers to recoup losses incurred during the previous year's energy crisis. We can see how this worked.

The Energy Price Guarantee, which limited consumer bills to £2500 annually in 2023 included generous allowances set by OFGEM.

Whilst pricing for end uses remained consistent, the wholesale gas prices fell signifcantly, however, some generating companies 'fixed' the price per therm by purchasing ahead, in the same way we may agree a fixed rate from an energy supplier for 12 months. This price fixing means that some companies were paying far more for gas than others during these price fixes.

Wholesale Gas Pricing

UK Wholesale Gas Price Trends for the years 2022 through to 2024. Its important to know that gas is measued in price per therm, a therm being 100,000 BTU (British Thermal Units) of heat energy. One Therm is approximately 4.1L of liquid gas, and about 105 megajoules of energy, which equates to roughly 30kWh of electricity. There are variances depending on the gas (Methane or Propane) and the type of power station.

2022

Prices reached record highs in 2022, peaking in August at 640p per therm

The energy crisis led to exceptionally high prices throughout much of the year. Prices began to fall in late 2022 but remained elevated compared to pre-crisis levels.

2023

Wholesale prices continued to decrease from their 2022 peaks. There was a spike in prices in early December 2022, but prices fell back in early 2023. Prices remained well below their 2022 peak but still above pre-energy crisis levels. In October 2023, prices rose to a six-month high of nearly 123p per therm.

2024

As of September 2024, the most recent wholesale gas price was 82.53p per therm. This represents an increase compared to the same month in the previous year. Prices are expected to remain volatile, with potential increases forecasted for the latter part of 2024.

Billing

It may surprise you to know that your power bill is only 40%-50% for the actual power with the rest made up from:

Power	40-50%
Network	18-20%
Operating	10-15%
Government	8-10%

Power is the actual cost of the power you've used, Network covers the national grid and the infrastructure needed to get the power to you, with operating being the markup from the energy supply company, and finally Government covers various government initiatives, of which there are none to speak of.

So in summary, less than half your bill is the electricity you've used, how can that be right?

When you consider that the wholesale price of gas fluctuates wildly, why aren't our bills varying equally given that we're paying as-if all our power was gas sourced? Well, some energy resellers fix their buy-in rates for a period, and even those who don't find a significant delay between wholesale gas pricing and the cost of generation, but what is always true is that there's no price compensation, that is, a lower wholesale power rate to normalise the months when a higher price was charged whilst the wholesale gas price was low.

Global Comparison

It is clear that the energy price crisis is not limited to the UK, but, we do have the 4th highest pricing in the world currently.

Consequential Impact

With UK companies paying anything from 22p to 30p a unit, everything they do is incurring additional cost, which is passed on down the line to consumers. GEN has itself had to increase prices twice in the last 2 years simply to offset the increased cost of energy, and in our specific business, customers are leaving us for offshore services that are not affected by the energy market here.

Most of the price increases in the last 12 months are due to energy prices, right across the market from consumables, servics, transport, etc.

Changes

The UK government, has been conducting a comprehensive review of the electricity market design since 2022, which will need to be endlessly reviewed, debated, and consulted. Given that we're now approaching Q4 2024, it's safe to say that the vested interests and profits of the power generators is running the show.

It is not unreasable to think that the energy market will not be returning to a more sensible pricing structure anytime soon with most resellers suggesting that prices are likely to instead rise through the end of 2024.

Micro Generation

If you're considering your own solar or wind, its worth knowing that the current rates the energy companies will PAY YOU for your excess power is peanuts (between 3p and 15p per kWh), but battery systems although expensive can allow you to use your own generated power through periods when there is no solar or wind. GEN Operate significant solar arrays at our datacentres.

A typical solar system will cost somewhere between £8k and £15k for a domestic property, and £30k to £90k for a commercial installation, but the pay-back period is far less given the current market and in most cases finance is available to spread the cost.

Conclusion

The market is broken, and despite all the investment in renewables, British businesses are isolated from the benefit that investment should have brought, instead paying the price for gas powered generation, even on a 100% renewable tariff and with the wholesale price of gas at only 82.53ppt.

We do have a fair mix of renewables, but in the winter on a calm day 56% of our power is still coming from fossil gas, 15% from nuclear, 12% from Solar, 6% from Biomass, 6% from off-shore wind, 3% from on-shore wind, and less than 1% from other sources. Solar and Wind are not consistent, whereas nuclear, hydro and geothermal are, so as a country we need to be investing in consistent green energy to replace fossil fuels and burning wood chips.

GEN are working with two suppliers to see if we can negotiate a bulk discount fixed rate by considering our energy use, and those of our customers and any other intersted UK business. Register an interest Here to be included.

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