Electricity is a commodity which can be bought, sold and traded across borders. The electricity market is a system which enables these trades to take place.
The wholesale electricity market is where power produced by generators is sold on to suppliers. Suppliers then apply a mark-up and sell it on to industrial, commercial and domestic consumers.
Additional aspects to the UK electricity market include the Capacity Market and grid Balancing Services.
The wholesale electricity market is volatile. Prices change regularly due to a number of factors that affect its supply and demand. Suppliers often change their tariffs to reflect these changes in wholesale prices. This makes it important, especially for business consumers to time their purchases to get the best value from supply contracts. Wholesale electricity prices typically vary between £40 and £50/MWh, with this cost element generally making up nearly 60% of consumer bills.
The following are different types of trading within the wholesale electricity market:
Bilateral Trading consists of contracts held between generators and suppliers. Bilateral trading of electricity is usually done through master contract frameworks which establish the terms and conditions for trading in a given period. Separate trading contracts within the framework then determine the price and amount of electricity to be traded.
The National Grid system operator is informed of the volumes to be traded to ensure the balance between supply and demand is maintained.
Short-term electricity trading is mainly matched on two exchanges APX and N2EX. This same day, or day ahead trading is called the spot market. An auction process matches offers from generators with bids from suppliers and larger consumers on a £/MWh basis.
The National Grid system operator must again be made aware of traded volumes in order to maintain the balance in grid capacity.
Long term trading prices are determined according to forecasted market developments. Long-term trading in mainly carried out by electricity brokers using energy market intelligence. Electricity price forecasts take into account many factors which can affect its future supply and demand.
Electricity in the UK is generated through a number of different technologies and fuel sources. This helps to mitigate risk by reducing our reliance on one particular type of generation and ensures that supply always meets demand in order to balance the electricity network.
Electricity is mainly produced at large power stations connected to the transmission system. However, electricity is also generated by smaller stations connected to region distribution networks. Various factors affect which type of generation sources are used, including government policies on the environment, market signals and decisions of individual private companies who own and operate the generators.
The burning of fossil fuels still accounts for a significant proportion of the UK’s electricity generation. This power is mainly produced through combustion of natural gas in thermal generators (32.3% in 2018). However, coal and oil still play a diminishing part in production (4.3% combined in 2018).
Nuclear electricity generation is achieved by splitting uranium atoms to produce heat in a process called fission. This heat is then used to produce steam which drives turbines in generators.
In 2018, 14.8% of our electricity came from nuclear reactors. This proportion is expected decrease over the next few years, with all but one nuclear power station expected to close by 2025. However, there are plans to build a new generation of reactor which could be operational by this time.
Renewable energy technologies use free, natural resources to produce electricity sustainably. Sources include wind, solar, wave, marine, hydro and biomass. In 2018, the combined electricity production from these sources was 26.6%. This comprised of wind and solar 17.6%, Biomass 7.6%, combined hydro sources 1.4%. The proportion of the UK’s renewable energy is set to increase as we aim to meet the EU target of 30% by 2020.
The UK relied on electricity imports for 4.78% of its power in 2018. This was carried by undersea cables called interconnectors, which transmit high-voltage power from Europe.
Currently there are four interconnectors to the UK. One from France and 1 from Belgium, with another two connecting mainland Britain with Ireland and Northern Ireland.
There are plans for an additional six electricity interconnectors to Norway, Denmark, Germany, France and Ireland. With three more already contracted to Norway, Belgium and France.
With these extra interconnectors online, it will increase our security of electricity supply and is likely to drive wholesale prices down, leading to cheaper energy bills for consumers.
The transmission system is operated by the National Grid, which is responsible for ensuring that electricity supply meets demand and the network stays in balance.
Transmission networks carry electricity at high voltages for long distances around the country to distribution networks.
Distribution networks take the higher voltages from the transmission system and lower them through electrical substations. The power is then carried to homes and businesses.
This is done through DNOs and IDNOs, who are licenced companies that own, operate and maintain the network of infrastructure (cables, pylons and substations) that bring us power.
Electricity storage facilities are large batteries that store energy from the grid. Electricity storage is becoming more important due our increasing reliance on unpredictable renewable energy sources like wind and solar. Large-scale battery storage facilities can help to smooth out the intermittent supply from these renewable energy sources. Batteries can be charged up when it’s sunny or windy, then discharge when the there is insufficient capacity available due to lower wind or sunshine.
Electrical storage facilities can also be used to trade electricity. Batteries can be set to charge up during times when electricity is cheaper (buy) and discharge back to the grid when prices rise (sell). This can offer financial returns for battery storage operators if managed properly and help to balance supply and demand on the grid.
The electricity market in the UK is privatised, meaning private companies are responsible for ensuring that we get the energy we need. This allows consumers to choose which supplier they want to provide their energy, increasing competition to provide better value and service to energy consumers.
In the UK, the electricity and gas markets are regulated by the Gas and Electricity Markets Authority. This is done through Ofgem, the Office of Gas and Electricity Markets.
Ofgem protects consumers interests by promoting competition, to help control prices and ensure organisations are achieving environmental targets. Ofgem also issue the licences required for companies to carry out activities within the sector and regulates the monopoly companies which operate the electricity and gas networks.
To find out more about regulation please see our Compliance pages.