Gas and electricity prices: How are they calculated?

The BBC have today published an article that provides slightly more information than normal, as to how our Gas and Electricity Prices are calculated and why they rise.

The message that the article is attempting to convey, is that our energy prices are based on market prices, not just from today or yesterday, but a range of prices over the past days, weeks, months and even years. The reason for doing this is to mitigate the risk that they could potentially face.

As an example, take today. An energy supplier will not purchase all it requires the day before, or even on the day. The reason for not doing so – the volume will not be achievable and prices may be high. It is a HIGH RISK strategy, that no energy company or will take. Instead, they spread their risk over time.

So the example in this article shows that the gas price in July 2008 was 100p/th, for delivery in the fourth quarter 2010. However, in spring 2010, it was below 40p/th. The point here being, that energy companies would have purchased some of the higher priced gas to cover their position. Therefore, this price is factored into the overall costing that we now see today. If the purchase prices are high, then ultimately, the energy companies will have to raise their prices.

Something else to consider, that this article doesn’t mention, are the transmission costs. These too affect the retail price.