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Wholesale prices: a review of extraordinary times

Tuesday, 10 December 201910 minute read
Wholesale
Pure Planet

Here’s Pure Planet's update on the wholesale energy market prices.

We look back over the past 18 months, and at how energy wholesale rates affect you.

  • Wholesale prices have swung significantly during the past 18 months, contributing to several supplier collapses
  • Wholesale prices climbed steeply to a peak around a year ago and have fallen back since
  • Wholesale gas prices are likely to remain stable throughout winter, due to the country’s gas storage sites being ‘full’ and no prolonged cold period currently in the weather forecast — but this could change
  • Other non-wholesale costs of supplying electricity and gas — transport, network and policy costs — have climbed ahead of inflation throughout the past year

What a time the power and gas wholesale markets have had over the past 18 months.

If you look back to May 2018, they had been enjoying a period of relative stability. Then boom. They rocketed, causing a noticeable spike, peaking in the autumn of 2018. Then, with a few minor and ups along the way they have drifted down since. Gas forward prices for the first quarter of 2020 peaked at just over 75p per therm just over a year ago and are now hovering just below 40p per therm — a drop of more than 45%.

In fact, gas prices today — which help to set electricity prices too; around 40% of Britain’s electricity is generated by gas — are currently lower than expected. Not for several years, have we entered the winter season with gas prices trending down in the way they have been recently.

Despite this volatility, and taking into account the increases in non-energy costs, we at Pure Planet have worked hard to maintain price stability for our Members. Wholesale prices have now returned to a level we had been anticipating.

Why are wholesale gas prices trending down?

As ever, it’s due to a combination of factors.

Let’s start with the big picture: the global economy has been slowing, especially in Asia which has been a growing customer for gas until recently. This has meant that some of the LNG that was being shipped to Asia from the big gas producing regions of the world has been diverted to Europe, which in turn has meant that its gas storage sites — including here in the UK — have been fuller than expected. New production coming online on the east coast of the USA has increased this glut. Spare LNG tends to find its way into, what’s known in the energy industry, as the ‘Atlantic Sink’ where throughout Europe some of the ‘biggest and best’ gas sea ports exist.

The other big factor on demand and price is the weather. So far this winter there has been no prolonged cold snap. The forecast appears to be benign temperature-wise for now, which in turn is helping to keep prices low.

There were short periods of a few cold days during the last three months where prices inched up. But the market responded quickly and supply from Norway increased within a day or two, pushing the wholesale price back down.

There was also a brief blip up in wholesale prices in September when French energy giant EDF warned of welding problems at some of its nuclear reactors. This spooked the continental power markets for a short time, but they readjusted quickly on the news that the problems were not likely to materially affect supply of power for the winter. In a nutshell, there would be no need for a dash to gas because of a shortage of nukes.

Finally, there’s the Brexit effect. Sorry to use the B word, but this too has played a part in layering on a sense of uncertainty to pricing.

In summary, we have a reducing demand, a glut of supply, full storage, and temperature-wise, a mild weather forecast — for now. This could change, of course. A cold snap could quickly push prices up, depending on its duration and how long the storage lasts.

Non-energy cost increases

Elsewhere, a number of regulated prices (which ultimately are carried in the kWh rates of British suppliers) have been climbing, putting pressure on a number of supply firms.

The transportation costs of moving power and gas around the country’s networks have climbed by over 5% this year. It’s been a similar story with some policy costs, such as the annual bill for Renewable Obligation Certificates (ROCs), which has risen by 27% over the past two years. This big, one-off bill, when one single payment is due to Ofgem, has led to several smaller firms struggling to pay for their ROCs and in one case going bust.

These non-energy costs have had an ‘offsetting effect’ on the overall price of each kWh of energy delivered to your meter.

Impacts on retail market

As the wholesale prices of gas and electricity have fallen over the past few months, the retail market has seen a spate of new fixed rate deals being offered by the Big Six, in particular.

These work by a supplier buying a forward hedge for a block of energy at a particular wholesale price point for up to a year ahead. A hedge is a commitment to buy enough energy to cover a corresponding ‘block’ of, say 5,000 new customers. That product will then be offered as a fixed-price-rate deal on the supplier’s website, or on price comparison websites, until it’s gone. When the 5,000 block has been used up, the product is withdrawn.

Crucially, when the fixed-term ends suppliers typically hope for the customers to forget their cheap deal has lapsed and that they ‘roll off’ onto the much more expensive rate without realising. It’s known in the industry as ‘tease and squeeze’. And it is the model that the Big Six, in particular, have relied on for many years to help make money.

It means the 11 million householders who are still on the Big Six’s standard variable tariffs are paying close to the new cap, which came into force on 1 October. This is £1,179 a year for an average home.

This is several hundreds of pounds more expensive than the limited-number of fixed deals being offered, often, by the very same suppliers.

So, while some of the fixed rates that pop in and out of the market can move a supplier to the top of the price tables, they are limited to a few, new customers, and available only for a limited time.

As ever, buyer beware.

How it affects Pure Planet

At Pure Planet, we have only one variable rate tariff. We have been working hard to manage this through the exceptional recent wholesale pricing environment, to keep our retail prices as smooth and as fair as possible while ensuring we hold to our pass through principle.

And as we’ve grown, we too buy forward hedges and have used these to provide as much stability and value as possible. In practice, having one tariff means our Members are always on our best rate.

For part of the year, around the time wholesale process peaked, we were not covering our costs — so our Members were getting better than pass through rates for a short time. Now, as prices have lowered — and with a combination of our hedging activity, which is happening every single day and the increases to policy costs — we are now back in balance.

We’ve held our electricity prices at the same level since January this year. Our last price change was in May when we lowered gas prices. And back in February, we dropped our Pure Planet Membership Fee (our equivalent to the standing charge), having made further improvements to our digital business model.

Inevitably, with the spot fixed deals dropping into the market, it means Pure Planet is not necessarily the very cheapest at the moment. That said, we are a very long way from being expensive either.

It’s also worth noting that the variable tariffs from virtually all other suppliers have remained static throughout much of the past year.

Pure Planet is not just about the price, of course. We have not set out to be the absolute cheapest all of the time. That would be unsustainable and, as we have seen, many firms which have tried to compete by offering highly discounted rates have gone bust.

Instead, Pure Planet is about offering great value, over the long term. You absolutely won’t get stung in unlucky month 13 with us, as you may well do with other suppliers.

Pure Planet’s value over two, three or even more years means you don’t have to worry. There is no contract end point, you won’t get bounced onto a more expensive tariff when you may not be expecting it. We don’t tease and squeeze. And you get a whole lot more value too.

Remember, Pure Planet’s electricity is matched from renewable sources — it’s 100% green. Many ‘cheap’ tariffs do not offer this or if they do, when the tariff ends, customers may be pushed onto a standard, brown tariff.

All of Pure Planet’s gas is carbon offset too — it’s included in the price. We were the first supplier in Britain to have both 100% renewable power and 100% carbon offset gas as part of the proposition.

So, while Pure Planet may not be the absolute cheapest, we offer great, all-round value — at £216 lower than the Ofgem price cap for an average medium user; for a higher user we’re £306 cheaper than the cap.

Be aware, too, that not all green variable tariffs offer better value than the caps; some green suppliers charge more and can be as much as £350 more expensive than Pure Planet for a medium user.

Don’t forget too that if you refer a friend or family member to Pure Planet you’ll both share £100 as a reward.

We’re keeping our prices as they are, for the time being. We’ll keep you posted if there’s any plan to change prices — our Members are always notified ahead of any price changes.

Get a quote for Pure Planet now. It takes just a minute or two. You’ll cut your carbon footprint, be helping to tackle climate change and you could save hundreds of pounds a year too.

Our tariff — in brief

  • We’ve one simple, variable tariff. You’re always on our best rate.
  • You never pay more than we pay for the energy you use. Our Members’ rates are based on wholesale prices, with zero markup. Our profit comes from the monthly £8.00 Membership fee (per fuel), which we keep low with industry innovations .
  • Since we started Pure Planet in September 2017, we’ve introduced a dual fuel discount worth £30 a year, decreased our monthly Membership fee twice, and increased our Members’ rate three times and cut gas prices once.
  • Our electricity is 100% renewable, and we carbon offset 100% of your gas.

And remember — we don’t have exit fees or fixed contracts. We’ll always be fair, transparent and honest with you.

Thanks for being part of Pure Planet.

Join the conversation in our Community and share your thoughts.

Chris
Co-founder