Prices that consumers pay are affected by the wholesale price of energy, which is the price companies pay to buy the gas or electricity they sell on to the end user.
Wholesale energy prices can be go up and down. Increased demand from emerging economies such as China; the continued unrest in North Africa and the Middle East; and the tsunami in Japan has caused the global oil price to rise dramatically.
Electricity is traded on different platforms depending on the date of delivery.
For short-term delivery (within-day or the next day), electricity is mostly traded through exchanges – an electronic platform that matches offers and bids through an auction process. The two exchanges are :
It is also possible to trade electricity for delivering further ahead in the future (for example, you can buy electricity for next winter). Most of the trading for longer-term delivery are done via brokers: intermediaries who match buyers and sellers. The London Energy Brokers Association publishes some data on these trades.
Energy companies buy a proportion of their supplies ahead of time. This helps make sure they can guarantee the supply of gas and electricity to their customers when it’s needed. Purchasing ahead like this is called hedging and helps to even out prices over time.
Leading independent economists NERA studied the rates at which prices rise and fall, looking in detail at Ofgem’s paper Do Energy bills respond faster to rising costs than falling costs (PDF 200 KB). They found that that there was no evidence to support the suggestion that prices rise faster than they fall. To find out more, read NERA’s Independent Pricing Report - May 2011 (PDF 500KB).
The independent consultants Frontier Economics found that competition in the British electricity market is strong and switching levels are high. Read the report Competition and Entry in the GB electricity retail market - January 2011 (PDF 250KB).
Britain’s energy market has given us among the lowest energy prices in Europe. The Department for Energy and Climate Change’s energy price figures from September 2011 show that Britain had the cheapest gas prices and third cheapest electricity prices out of the original 15 European Union countries.
Ofgem's Retail Market Review report has shown that energy companies have on average made only 1.6 per cent profit on supplying customers since 2005, which compares favourably with other markets such as supermarkets and telecoms.