We all know by now that energy prices
have gone up over the past couple of years, but what’s causing this unprecedented rise? Well, there’s a few factors at play, from disrupted supply lines to extreme weather conditions increasing demand, all of which contribute to increased wholesale prices.
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Wholesale gas prices - Over time
What is the wholesale price of gas right now?
According to Ofgem, average wholesale gas prices in the week starting 24 April 2023 were 129.6p per therm. This is down from an average of 131.96p the previous week, and from a record high of 592.56 per therm in late August 2022.
Here are the average wholesale gas prices per therm over a recent 12 week period:
||Price per therm of gas
|Feb 6, 2023
|Feb 13, 2023
|Feb 20, 2023
|Feb 27, 2023
|Mar 6, 2023
|Mar 13, 2023
|Mar 20, 2023
|Mar 27, 2023
|Apr 3, 2023
|Apr 10, 2023
|Apr 17, 2023
|Apr 24, 2023
How much have wholesale gas prices risen by in the past two years?
While the table above shows that wholesale gas prices have been steadily falling over the last three months, it doesn’t show the bigger picture. The wholesale price of gas rose massively during the second half of 2021 following more than a decade of relatively stable prices. In August 2021, the average price per therm of gas rose above 100p for the first time ever, and then shot up to above 200p per therm just two months later.
These significant price increases were due to a number of external factors, not least supply chain issues following months of pandemic restrictions and a subdued global economy. Prices seemed to stable slightly at the beginning of 2022, but this was quickly disrupted by Russia’s invasion of Ukraine. Wholesale gas prices shot up once again in March 2023, followed by months of highly volatile and fluctuating prices.
And while wholesale prices have been coming down over recent weeks, they are still significantly higher than what they were two years ago and any time before that, and it is not clear whether they will ever get to their previous level again.
The following graph shows the level of wholesale gas prices over the past two years:
What are wholesale costs?
The wholesale cost of gas is the price at which your energy supplier pays for the power. While this isn’t the same as what you pay as a customer, it does make up the biggest proportion of your bill at around 38%, so wholesale costs do go a long way to determining your bill at the end of the month.
Therefore, it’s important to be aware of rising wholesale costs and the potential impact of this on your energy bills. Wholesale costs of gas and electricity are constantly fluctuating, and any significant drops or hikes may take a few weeks to be passed on to you, the consumer. But being ahead of the curve can be beneficial, as you can prepare for rising bills by cutting back on energy usage where appropriate.
How do wholesale prices affect my energy bills?
As mentioned before, wholesale costs make up a significant chunk of your energy bills at just over a third. But other factors are also at play, operating costs and tax.
According to Ofgem, dual fuel energy bills are generally broken down by:
- Wholesale costs (38%) – The price your supplier pays for gas and electricity
- Network costs (24%) – Goes towards the maintenance of the National Grid and supply lines
- Operating costs (18%) – Covers running costs of the energy supplier i.e. customer service and online systems
- Government social & environmental schemes (11%) – Covers government initiatives that aim to increase the usage of green energy
- VAT (5%) – Value added tax
- Other direct costs (3%) – Covers any administration and commission costs
- Supplier pre-tax margin (1%) – What the energy supplier makes as profit
What determines wholesale gas prices?
Wholesale gas prices are influenced by a number of global factors, but it essentially comes down to supply and demand. As the UK has been a net importer of gas since the middle of the 2000s, suppliers in this country are even more susceptible to price changes driven by factors beyond their control, such as war and extreme weather conditions in far away places.
One of the main factors causing rising wholesale gas prices is a reduction in supply. Both Russia and Ukraine are large exporters of natural gas to both Europe and beyond, but the recent war there has caused major supply lines to be disrupted, causing a significant drop in the amount of gas that is imported to Europe and the UK, pushing up prices.
The other major contributing factor in the current rise in wholesale gas prices is an increase in demand. Although gas, which is still the main fuel source for central heating systems in the UK, was in relatively low demand domestically due to a series of mild winters and improved energy-efficiency, demand from gas-fired power stations has been increasing.
This is because as the country moves away from fossil fuels in its aim to achieve net zero, less coal-fired power stations are being used, with gas being the alternative.
This has led to an overall net increase in demand for natural gas in the UK, while a reduction in the global supply has created the perfect storm for unprecedented rises in wholesale costs.
How does this relate to my bills?
When reading your energy bills, you’ll see that your gas usage is measured in kWh. One therm, which is 100 cubic feet of natural gas, is equal to 29.3 kWh. So, 129.6p per therm at wholesale prices works out as around 4.4p per kWh of gas.
However, this is the price the supplier pays for the gas. You will also have to pay a standing charge on top of this, which currently averages 28p per day, regardless of how much energy you consumer. This is to cover all the other factors that go into your energy bills apart from wholesale costs.
For more information, head over to our guide on average energy costs per kWh.
How do wholesale prices affect the price cap?
The price cap, which was introduced by Ofgem in 2019, sets the maximum price energy suppliers can charge customers. It’s currently set at £3,280 per year for the average dual fuel household, after falling by almost £1,000 when the price cap was adjusted on April 1st, reflecting the recent fall in wholesale gas prices.
While the price cap is designed to prevent customers from being ripped off by energy suppliers, the level it is set at is determined by a multitude of factors, with wholesale energy costs being the primary driving influence.
As energy suppliers are buying gas at wholesale prices, domestic energy bills must cover these wholesale costs or else the supplier will be making a loss. Therefore, as wholesale gas prices have surged over the last two years, the price cap has been adjusted to cover these increased prices. This is why you have seen such an increase in your bills, despite the most recent reduction.
These rising wholesale costs are also one of the main reasons why so many smaller, independent energy suppliers have gone out of business over the last two years, with many blaming Ofgem for not raising the price cap soon enough.