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How does the wholesale price of gas affect household energy bills?

- Published October 17, 2011
At RF Training we train plumbers, electricians and gas fitters; as such we have to keep on top of the current news in these areas as they may affect our trainees and their customers.

Recently, energy suppliers have been pressured by the government to regulate and, ultimately, lower the cost of their fuel prices as three of the big six energy suppliers have raised their prices by a further 20%.

These firms have blamed the rise in the price because of the cost of buying it’s energy from wholesalers.

How does the energy firm set costs for consumers?

• Like any other retailer, they buy their product from a wholesaler.
• Prices are set based upon the expected demand to the available supply
• This means the winter contract may well have a higher cost than the summer
• Transmission costs, also affect supply, for instance if a pipeline or energy plant goes offline, costs will rise.
• Prices can also be set by market leaders as once one raises its price the others are likely to follow suit.

It is difficult to proportion price hikes directly to a wholesalers costs as, much like the stock market, energy prices will change on regular basis with suppliers trying to get the best price they can.

It depends on how good the trading has been. If it’s good, energy prices can plateau or even fall, but if it’s bad this results in a price hike.

Even energy regulator, Ofgem, has to guess how much the companies have paid for their gas and power, because it’s hard to pin down, not even the wholesale prices can tell the full story.

Should the Government step in?

They used to be able to. However, over the years the energy industry has been privatised, and companies want to make money, so it’s easier said than done.

To force them to sell below cost, the government would have to cover the shortfall itself or the energy companies might simply leave the UK market, this would undoubtedly affect the economy considering how much debt the country has. More expenses and pay outs are unlikely to do the economy any good.

Let us know what you think to the recent price hike and what needs to be done over at our Facebook page.

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