Energy suppliers buy the energy they require from wholesale markets. Essentially, they buy it from the producers of energy such as power station operators or gas producers. This is where the vast bulk of a customer’s bill comes from, with the cost of wholesale energy accounting for roughly 75% of the bill. Several factors come into account when finalising the set price of energy.
Supply and demand
Now, more so than ever before, the demand for energy is at an all-time high. Harsher winters have meant an increase in demand for power as home owners and businesses set about warming their property. The same is true in the summer (in warmer countries, anyway) where there is a greater emphasis on cooling properties using air conditioning units.
However, power stations require maintenance and when they go off-line it can see a decrease in supply and a drop in generation capacity. This is also compounded by a greater need to reach health and safety as well as environmental standards and air pollution limits set by the government.
To comply with these new standards meant the installation of new equipment to reduce emissions. This has increased the wholesale cost of electricity as equipment costs are passed on to customers.
The cost of energy production
The vast majority of the UK’s electricity power is produced by coal and gas fired power stations. Further sanctions on these operators have meant that they too must go about purchasing emissions allowances from the EU. This accompanied by the ever changing cost of coal and gas has had a dramatic effect on the UK’s electricity wholesale market prices;
The cost of gas
The UK is becoming more and more reliant on purchasing imported gas as our own natural resources are depleted. This factored in with the cost of oil, the unstable international gas market and our ability to pay for imports all increase energy costs.
Fewer coal plants
The higher emphasis on the detrimental effects power production causes to the environment has meant that many of the UK’s coal plants are obsolete. They are still used, but with the high costs associated with massive CO2 emissions. The government has forbidden the construction of any new coal plants in the UK unless the majority of their emissions are buried underground.
As mentioned above, a greater emphasis on the environment influences the price of energy. The technology required to halt the impacts on the environment has led to an increase to the already rising cost of energy prices. The earthquake that caused such devastation to Japan is also a factor, increasing demand for oil and gas to replace nuclear power station production; greater demand increases prices.
Can I avoid a rise in energy prices?
By ensuring you are on a fixed rate tariff you can avoid a sudden hike in energy prices. This allows a greater ease of mind when attempting to organise a household budget. However, if prices were to fall your rate would still remain the same and not feel the benefits. Variable tariffs would see your rate fluctuate with the prices and possible benefits.
Eileen Blackstone is a writer in Aberdeen who is extremely concerned about energy prices and her ability to heat her home adequately this coming winter.