Wholesale energy – definition and meaning
The term wholesale energy refers to energy – such as natural gas and electricity – which is purchased and sold (traded) by several different types of participants. Electricity generators or natural gas (gas) producers – companies that import or produce energy – sell energy in the wholesale markets. Energy-consuming businesses, such as large industrial companies, or those that have energy-consuming customers – retail suppliers – purchase the energy they require in the wholesale energy markets.
Trading houses and banks use the wholesale markets to provide liquidity, manage risk, optimize assets, and speculate on the price movements of wholesale energy.
In other words, wholesale energy refers to the buying and selling of energy products in the wholesale market by producers and retailers of energy.
Since the deregulation and restructuring of the electricity and general utilities markets at the end of the last century across much of the world, wholesale energy markets have evolved considerably.
Wholesale energy prices
Wholesale energy products are traded as commodities, much like coffee, gold or copper. Commodity markets are often volatile – the prices of energy purchased and sold in the wholesale market can change frequently, and sometimes quite dramatically.
Regarding prices, Powerex Corp., a company that purchases and sells wholesale electricity, natural gas and environmental energy products in Western North America, writes:
“Wholesale energy prices are set by the basic market forces of supply and demand. In North America, the price of energy is typically higher during the cold winter months, with an increased need for heating, and again during the warmer summer months when the use of air conditioning increases in warmer climates.”
“Daily price fluctuations also exist. Demand and prices generally increase during working hours (‘peak’ hours) and drop overnight when activity is low (‘off-peak’ hours).”
In a report – ‘Wholesale Energy Markets in 2016’ – published by Ofgem (Office of Gas and Electricity Markets), the government regulator for electricity and downstream natural gas markets in the United Kingdom, wholesale energy costs are currently the biggest component of final consumer bills.
In the UK, wholesale energy costs typically make up approximately 45% of the average domestic consumer’s bill.
In the Ofgem report, the authors wrote:
“In a competitive market **wholesale prices are based on the cost of the marginal source of supply. This is the final source of gas or electricity supply needed to meet demand.”
“What makes up the marginal source of supply will vary depending on what supplies are available, the costs of those supplies, and the level of demand.”
** Wholesale prices are what wholesalers charge retailers.
At the end of last year, Ofgem threatened to penalize companies that were caught trying to manipulate the wholesale energy market.
Wholesale energy – the market in France
Upstream: electricity supplied to France’s grid comes from:
– Generating stations, which make up more than 90% of total supply
– Imports from other European nations
Some of the production is not traded on the wholesale market and is supplied directly to end consumers due to the presence in France of integrated energy companies, i.e. they are both producers and suppliers.
The remaining production is bought and sold on the wholesale markets. EDF (Électricité de France S.A.) also offers access to 5,400 MW of its generation capacity located in France through quarterly auctions (VPPs – virtual power plants).
Downstream: energy (electricity) is drawn from the grid:
– for end consumption for more than eighty percent
– for export to other nations
– and some of it is lost
Regarding the trading of wholesale energy, France’s Regulatory Commission of Energy (Commission de régulation de l’énergie) writes:
“In the wholesale market electricity is traded (bought and sold) prior to its supply to the destination grid of the end customer (individual customer or commercial).”
Video – Wholesale energy costs explained
This British Gas video explains how an energy bill can be broken down into a number of different costs. As far as UK consumers are concerned, the largest contributor to their costs is wholesale energy. What makes up the cost of energy bills in the UK is very similar to what occurs in most other advanced economies (rich nations).