UK wholesale electricity prices have been a focal point of discussion and analysis, especially given the recent volatility and price fluctuations. Service Delivery Director at TEAM Energy, Graham Paul, delves into the trends and their implications for UK businesses.
The UK wholesale market energy crisis has been a challenging period for businesses, marked by increased costs and operational difficulties.
Recent Trends and Market Insights
Over the past year, the UK wholesale electricity market has exhibited notable trends:
- Price Peaks and Troughs: Prices spiked during high demand and low renewable generation periods, while dipping during high renewable output and lower demand.
- Increased Renewable Generation: The growing integration of renewables has contributed to a more sustainable energy mix, stabilising prices despite their inherent volatility.
- Impact of Fuel Prices: Fluctuations in natural gas prices have significantly influenced electricity prices, underscoring the interconnected nature of energy markets.
Impacts on UK Businesses
The energy crisis has had profound impacts on UK businesses, affecting their operations, costs, and overall financial stability:
1. Higher Energy Bills: Increased costs have eroded profits and raised operational expenses.
2. Price Increases: Businesses have had to raise prices, potentially impacting sales and profit margins.
3. Operational Adjustments: Some businesses have reduced hours, closed temporarily, or laid off staff to manage rising energy costs.
4. Delayed Investments: Higher costs have led to delays in planned investments and growth initiatives.
5. Competitive Disadvantage: Energy-intensive businesses have faced a competitive disadvantage compared to those with lower energy needs.
Labour Government’s Key Energy Policies and Actions
Since coming into power, the Labour Government has introduced several key energy policies aimed at transforming the UK’s energy landscape:
Key Energy Policies
1. Net zero electricity system by 2030: Aiming to make the UK a clean energy superpower. This includes increasing the share of renewable energy sources such as wind, solar, and hydroelectric power.
2. Great British Energy: Establishing a new public energy company to control UK energy production and ensure it serves the public interest.
3. Energy Efficiency Upgrades: Upgrading Britain’s homes to improve energy efficiency and reduce fuel poverty. This includes retrofitting homes with better insulation and energy-efficient appliances.
4. Onshore Wind and Solar: Lifting the ban on new onshore wind farms in England and is promoting a rooftop solar “revolution” to triple solar power capacity by 2030.
5. National Wealth Fund: Establishing a £7.3 billion fund to support important energy projects in partnership with private investment.
6. Planning Reforms: Making the building energy infrastructure easier, including changes to the National Planning Policy Framework.
7. Onshore Wind Industry Taskforce: Collaborating with industry and regulatory bodies to overcome barriers to wind farm development.
Challenges and Risks of Increased Renewable Energy
Renewable energy sources like wind and solar are intermittent, meaning their output can fluctuate based on weather conditions. This intermittency can lead to price volatility in the wholesale market, as supply may not always meet demand.
The UK uses a marginal cost pricing system, where the price of electricity is set by the most expensive method needed to meet demand, often natural gas. Even though renewable energy is cheaper to produce, the wholesale price can still be influenced by the cost of gas. Here’s how it works:
1. Electricity Generation Mix: Electricity is generated from various sources, including natural gas, coal, biomass, nuclear, hydro, wind, and solar. Each of these sources has different production costs.
2. Demand and Supply Matching: To meet the electricity demand at any given time, the grid operator dispatches electricity from the cheapest available sources first (e.g., wind, solar). If demand exceeds the supply from these cheaper sources, more expensive sources (e.g., natural gas) are brought online.
3. Setting the Price: The price of electricity for all suppliers is set by the cost of the last (most expensive) unit of electricity needed to meet the total demand. This is known as the “marginal cost.”
Integrating a higher share of renewables requires significant upgrades to the grid infrastructure. These upgrades are costly and can lead to higher overall electricity prices if not managed efficiently.
To mitigate the intermittency of renewables, energy storage solutions and balancing mechanisms are needed. These technologies are still developing and can be expensive, adding to the overall cost of electricity.
Ensuring that policies and regulations keep pace with the rapid growth of renewables is crucial. Inconsistent or unclear policies can create uncertainty and hinder investment in renewable energy projects.
While renewable energy offers long-term benefits for sustainability and cost reduction, addressing these challenges is essential to ensure a stable and efficient wholesale electricity market.
Geopolitical Events Impacting UK Wholesale Electricity Prices
The UK wholesale electricity market is deeply interconnected with global energy markets, making it susceptible to various geopolitical events. These events can cause significant fluctuations in electricity prices, affecting businesses and consumers alike. Some of the key geopolitical factors that have influenced UK wholesale electricity prices over the past year include:
Russia-Ukraine Conflict
One of the most significant geopolitical events impacting the UK energy market is the ongoing conflict between Russia and Ukraine. On January 1, 2025, Russia ceased gas exports via Ukraine, cutting off a vital route for Europe. Historically, Ukraine has been a significant transit hub for Russian gas reaching European markets, including the UK indirectly through LNG imports. This supply disruption led to a 12% surge in gas prices in January 2025 compared to December 2024. The increased competition for LNG in Europe has driven up prices globally.
Middle East Instability
The Middle East remains a major source of global energy supply, producing nearly 30% of the world’s oil. Tensions in the region, exacerbated by geopolitical manoeuvres and conflicts, have caused energy prices to react swiftly. In late December 2024, Brent crude oil prices rose by 4% in just two days, peaking at $88 per barrel. Higher oil prices often cascade into the cost of gas and electricity generation, leading to rising costs across the board for UK businesses.
US Energy Policy
In early December 2024, President Biden announced a ban on new offshore oil drilling in vast areas of US coastal waters. While aimed at tackling climate change, this decision signalled reduced future US oil production, potentially straining global supply. The US has become a key LNG supplier for Europe and the UK since the Ukraine crisis began.
President Trump plans to reverse President Biden’s ban on new offshore oil drilling. Since taking office, Trump has announced his intention to “immediately” lift the ban on offshore drilling. This ban had made more than 625 million acres of U.S. coastal waters off-limits for new oil and gas production.
Trump’s energy policy focuses on increasing oil and gas production, which includes unfreezing offshore drilling and reversing restrictions on fossil fuel development. This shift aims to bolster the role of Big Oil in the energy sector and reduce reliance on foreign energy sources.
Changes in U.S. energy policy can influence global oil prices and market dynamics, affecting international relations and trade.
Impact of Sanctions
Sanctions imposed by countries or international bodies can significantly impact energy markets. For example, Western sanctions on Russia following the annexation of Crimea in 2014 affected their ability to invest in their energy infrastructure. These concerns can lead to an increase in natural gas prices as markets react to perceived risks. The ongoing sanctions related to the Russia-Ukraine conflict continue to influence energy prices, contributing to market volatility.
Maritime Routes and Chokepoints
Maritime routes are essential for the transportation of oil and liquefied natural gas (LNG). However, many of these key paths are vulnerable to geopolitical tensions and disruption due to war, piracy, or sanctions. For instance, the Strait of Hormuz, a critical chokepoint for global oil shipments, has been a hotspot for geopolitical tensions. Any disruption in these routes can lead to restricted energy resources and significant price volatility.
Impact of Ofgem’s MHHS Programme on UK Wholesale Prices
MHHS Implementation Timeline
The Market-wide Half-Hourly Settlement (MHHS) Programme is set to be fully implemented by October 2026. This timeline includes various phases of testing and integration to ensure a smooth transition for all market participants.
MHHS Main Goal
The primary goal of the MHHS Programme is to create a more flexible, efficient, and accurate electricity market by settling all electricity market trading based on half-hourly data. This will enable suppliers to match trading, expected customer demand, and actual usage more precisely.
MHHS Impact on Electricity Wholesale Prices
The MHHS Programme is expected to have several impacts on UK wholesale electricity prices:
1. By using accurate half-hourly data, the settlement process becomes more efficient, reducing discrepancies and improving market operations.
2. Accurate price signals will be sent to suppliers, reflecting the true cost of serving customers at different times of the day. This can lead to more competitive pricing and better demand management.
3. Improved data accuracy and efficiency can help reduce price volatility in the wholesale market, leading to more stable prices.
4. The programme will enable new products and services, such as time-of-use tariffs and vehicle-to-grid solutions, which can further optimise energy usage and costs.
MHHS Benefits for Businesses
Businesses in the UK can expect several benefits from the MHHS Programme:
1. More efficient market operations and accurate pricing can lead to lower energy costs for businesses.
2. Access to detailed half-hourly consumption data allows businesses to better manage their energy usage and identify opportunities for savings.
3. The programme will support the development of innovative energy solutions, such as battery storage and smart appliances, providing businesses with more options to optimise their energy consumption.
4. By enabling a more flexible and efficient energy market, the MHHS Programme supports the UK’s transition to a low-carbon economy, helping businesses meet their sustainability targets.
MHHS Programme Risks
The value of Ofgem’s business case for the Market-wide Half-Hourly Settlement (MHHS) Programme is estimated to be £1.6 billion in net benefits over the period from 2021 to 2045. This value is derived from the expected improvements in market efficiency, reduced costs, and enhanced flexibility in the electricity market.
The MHHS Programme presents several risks that need to be managed effectively to ensure its successful implementation.
1. The transition to half-hourly settlement involves significant changes to existing systems and processes. This complexity can lead to delays and increased costs if not managed properly.
2. Handling large volumes of half-hourly consumption data raises concerns about data privacy and security. Ensuring that data is protected and used appropriately is crucial.
3. The readiness of market participants, including suppliers and network operators, to adopt the new settlement processes is a critical factor.
4. The financial costs associated with implementing MHHS can exceed initial estimates.
5. Ensuring compliance with regulatory requirements throughout the implementation process is vital.
6. Engaging and coordinating with a wide range of stakeholders, including industry participants and consumers, is necessary to ensure smooth implementation.
Conclusion
The UK wholesale electricity market has undergone significant changes over the past 12 months, driven by a combination of fuel costs, renewable energy integration, weather conditions, geopolitical events, and regulatory changes. For businesses, staying informed about these trends is essential for making strategic energy procurement decisions.
By understanding the factors influencing wholesale electricity prices, businesses can better navigate the complexities of the market and optimise their energy strategies. For more detailed insights on wholesale electricity prices, visit TEAM’s UK Energy Wholesale Prices Market Review.
Organisations in the UK face growing pressure to meet net zero targets. Energy efficiency has the greatest potential to make the biggest impact on organisations’ emissions, energy use, and costs in the shortest amount of time.
According to the International Energy Authority (IEA), over the last two decades, global energy efficiency measures have halved the amount of carbon emissions that would have otherwise been released due to population and income growth. Between 2000 and 2022 alone, energy efficiency measures have helped reduce the energy intensity in buildings and transport by 35% globally.
Many organisations haven’t done the basics of energy efficiency improvements, which means each one has a wealth of untapped potential for carbon reductions and energy savings.