This market is where generators of energy and suppliers trade with one another. The energy suppliers buy from the generators at wholesale prices and then add their own mark up and sell it on to customers at what is a higher price. But because the market for energy is so volatile, with prices constantly fluctuating, energy suppliers need to regularly change the tariffs that they offer to customers to reflect the changing wholesale prices.
At a glance
The market for wholesale energy is the place where suppliers purchase energy from those who generate it. Although prices are volatile and can change very quickly, they usually hover between a range of £40 MWh and £50 MWh. It is responsible for making up up to 60 percent of domestic energy bills. Over the next several years the wholesale cost of energy is set to go down.
How it works
The suppliers of energy buy it on the wholesale market in order to be able to supply it to their customers. Some suppliers, if they have purchased too much energy, can also sell it on the wholesale market, which helps to combat against price volatility.
The generators of energy sell the commodity, which has been produced by their power plants, via the wholesale market. In the case where they have not produced enough energy to meet demand, generators are able to purchase it through the wholesale market.
Large customers have actually begun purchasing their energy directly from the wholesale market themselves, although this is a relatively new phenomenon. Energy traders buy and then sell energy via the wholesale market in order to ensure that their customers get the best possible price.
Trading on the wholesale market
Bilateral trading is one of the most common types of trading on the wholesale energy market and actually refers to the contract that is in place between suppliers and generators for the purchasing of energy. Typically it is framed by a master contract which works to establish what the overarching trading considerations are. Based off of this, individual contracts set out what amount of electricity can be traded and at what price. In order to iron out any market imbalances, energy generators send information to the National Grid (the system operator) regarding the amount of energy that has been traded prior to delivery.
Market trading sees the supply and demand for energy matched on two separate exchanges for delivery on either the same day or the next day. This works to avoid imbalances within the wholesale market and due to grid capacity, the National Grid needs to be aware of how much energy has been traded.
The longer term trading of energy happens via the vessel of energy brokers. Making up the London Energy Brokers' Association are nine separate members, which include the likes of GFI Group Inc, BGC Partners, PVM Oil Associates, plus several others. The prices with this type of trading are not established through the mechanism of supply and demand but by developments within the wholesale energy market.