Energy wholesale prices are at their cheapest level for a decade but it remains to be seen if money potentially saved by suppliers will be passed on to customers.

Households will hope that energy suppliers do pass on savings on gas and electricity – experts say prices for both have tumbled to near decade lows

There has been a 17.6 per cent reduction in the change of gas prices from 29 November 2019 to 6 December 2019, according to data from Beond, an energy markets consultancy firm. 

Cheaper bills: Wholesale prices have fallen to their lowest price for the first time in a decade

Cheaper bills: Wholesale prices have fallen to their lowest price for the first time in a decade

Gas prices are now at their lowest since 2009, with suppliers now paying 24.87p per therm compared to 25.18p per therm a decade ago, according to Ofgem data. 

In September 2018, the price was around triple this figure, data on the energy regulator’s website show and have been falling ever since. 

Wholesale electricity prices are also now cheaper than they were at the start of the decade – in June 2010, it cost 42.18p per megawatt per hour (MWh) whereas at the start of October this year, prices were at 37.32p MWh. 

Compared again to the recent peak in September 2018, the price was nearly double this.  

Lee Drummee, analyst at Cornwall Insight, said: ‘Ultimately, these lower wholesale prices should be fed through to customers bills.’

Mild weather, a change in gas supplier as well as healthy supply margins have all contributed to prices falling.   

Those hoping for falling wholesale prices to drag down their bills automatically because of the energy price cap will be disappointed.

The Ofgem price cap, which puts a limit on how much suppliers can charge households on standard variable tariffs, is decided depending on how much wholesale charges are at the time. 

Ofgem reviews the price cap every six month and announces how much the price cap will be two months before the change. 

However, as wholesale prices can change dramatically, customers could, in theory, find themselves paying more if the cap went up, at a time when wholesale prices are down. 

Rik Smith, energy expert at uSwitch, said: ‘Ofgem calculates the price cap based on their view of how much it costs to supply gas and electricity. 

‘From the wholesale cost of energy, to costs for maintaining the networks of pipes and wires, subsidies for green energy and a slice for supplier profits, these all affect the price of standard variable energy tariffs.

‘In the last few months, the wholesale cost of gas and electricity has fallen but some other costs have risen. 

‘Whether Ofgem decides the cap should increase or decrease, we don’t expect it to change by much when they announce the next level in early February.’ 

Suppliers could get more competitive with their deals in order to entice more customers to switch to them.

Customers who are on standard variable tariffs, which are generally more pricey, are encouraged to see if they could save by switching to a fixed deal instead. 

The next price cap change will be announced by Ofgem in February which will then take effect at the beginning of April. 

This graph shows how the price of electricity is lower than it has been in the last few years

This graph shows how the price of electricity is lower than it has been in the last few years

Smith added: ‘Consumers must remember though, that this is only a cap on the worst value deals and a standard variable tariff is still a rip off. 

The cheapest deal on the market right now is £344 a year cheaper than the price cap – so spending ten minutes comparing energy deals could save you hundreds of pounds’. 

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Gas and electricity prices have also been set for next year with current gas prices for next summer much lower than were set in November 2018.

The prices are set in advance so suppliers can buy their stock ahead of time. The amount firms pay at the time means they can guarantee a good price before it is delivered in the future.

Beond reported that January 2020 gas prices have fallen by 8.7 per cent since the end of November.

Similarly, electricity prices for summer 2020 are also much cheaper when compared to the prices set in November 2018 and also when compared with the January and winter prices.  

However, this is due to the fact that less energy is generally used over the summer time and therefore less demand means cheaper prices. 

The turnaround in prices has stemmed from a change in Britain’s gas supply mix, healthy gas storage levels in Europe and the changing role of gas in power generation to become more flexible.

Lee Drummee – Cornwall Insight 

Electricity wholesale prices have also decreased as, over the past decade, it has largely been driven by changes in the gas price as gas-fired generation is often the marginal source of supply and therefore sets the electricity price.

Changes in carbon prices have also influenced electricity prices in recent years.

One of the main reasons that gas prices have fallen so dramatically is due to the changes in supply, such as a larger volume of liquefied natural gas which is also coming from a greater variety of countries. 

This has led to more gas being on the network than there is demand. 

Other reasons include the fact that Europe’s gas storage is currently well stocked thanks to plentiful LNG deliveries meaning that any withdrawals from the storage has been limited. 

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Mild weather forecasts and weaker power demand have also meant prices have stayed low. 

The low wholesale prices should be reflected in customers bills – and many of the Big Six have recently dropped their prices in response.  

They have recently acquired a host of new customers after introducing a number of cheaper tariffs to rival smaller suppliers deals.  

The larger suppliers have been able to lower their prices not only due to cheaper wholesale costs but also a lack of trust from households after a large number of smaller suppliers ceased trading.   

Increasing competition in the market has also led to a decrease in costs for customers as the more pressure there are from suppliers competing with one another, the more likely the wholesale market will reflect the true costs to supply energy. 

Lee Drummee adds: ‘There is a dramatic difference between the gas prices since 2009, falling by around 5p per therm over that period.

‘The turnaround in prices has stemmed from a change in Britain’s gas supply mix, healthy gas storage levels in Europe and the changing role of gas in power generation to become more flexible.’

‘The most significant difference in Britain’s supply mix in comparison to 2009 has come from LNG. 

‘This has not only helped put downward pressure on British gas prices but also led to a noticeable fall in storage withdrawals.’ 

 

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