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How the energy market works

Thinking about how the energy market works and the process by which gas and electricity are delivered to our homes is not something most people tend to think about very often. But we live in a world which is increasingly dependent on energy to facilitate our lifestyles. Although our appliances are now much more energy efficient, our overall usage has increased as our reliance on technology grows. In fact, our global energy demand has risen by 50% since 1990 and is only expected to grow further, so it is important to know how we power our society.


The process

The process required to generate and deliver electricity to our homes is a complex one, due to the complex nature of electricity as a product. It cannot be stored in large amounts but must be available instantly, though supply and demand is constantly in flux. Therefore it is the job of the National Grid to regulate electricity flows on the grid, matching this supply and demand at a second’s notice.

At a basic level, the process involves 3 key steps.

  • Generation
  • Transmission & Distribution
  • Retail

It is also possible to import energy from other countries using structures called interconnectors, which physically link the UK to other countries. This also means we can export any surplus energy we produce to neighbouring countries. At present, Britain has interconnectors with France, the Netherlands, Northern Ireland and the Republic of Ireland.

Generation

Electricity

When energy is generated it can come from one of several sources. For electricity, this is most often gas, nuclear, renewable sources, or coal. Britain’s electricity supply comes mostly from gas (39%) and renewable sources (29%), with nuclear (19%), coal (6%) and other sources (6%) forming the rest of the supply. The sources used vary over time and depend on several factors, including the cost of non-renewable sources, the availability of renewable sources, environmental policies at the time, and prices compared to other countries.


Gas

Gas tends to come from offshore gas fields, pipelines from Europe, or as liquified natural gas. We currently produce roughly half of the amount of gas we need to power the UK, so a large chunk is imported from Europe via interconnecting pipelines and is transported on the road as liquified natural gas in tankers.

In most cases energy is generated at large power plants which are linked to the national transmission networks, but can also be at smaller plants connected to regional distribution networks.


Transmission & distribution

Electricity

Once electricity has been generated, it is transmitted around the country at a high voltage either underground or using cables between electricity pylons. A distribution company then picks up this electricity and delivers it to our homes and businesses. This distribution operates at a much lower voltage and pressure for safety reasons.

Gas

Gas is transported across the country using an underground system of high-pressure pipes. As with electricity, a distribution company steps in and takes this gas to deliver it to homes and businesses across the country. Distribution companies are responsible for fixing any faults or issues with the delivery of power.

Retail

Energy suppliers come into play as these are the companies which buy energy from the wholesale market and sell it on to consumers. This is where competition is important to ensure that no single supplier achieves a monopoly on the market.

If homes have solar panels or other means of generating their own electricity, it is also possible to send surplus energy back into the distribution network. In the past a Feed-In Tariff scheme allowed these homes to sell this energy back, but this ended on 31st March 2019.

Who manages the energy market?

There are 3 key players in the UK energy market; the government, the National Grid, and Ofgem. The electricity and gas markets are privatised so each of these bodies has an important role to play to ensure that everything runs smoothly.

The government sets out a long-term strategy for energy policy, which affects how the energy market is run over time. The National Grid is responsible for the day to day management of energy flows on the grid. Ofgem, the energy regulator, exists to protect consumers and promote competition amongst energy companies. This affects the return that large network companies get and contributes to changes to rules governing the energy market.

These network companies are in effect a fourth player, and they are the energy suppliers that we pay to deliver gas and electricity to our homes.

How does the energy network affect your bill?

Roughly each UK household pays £250 of their dual fuel bill towards the operation and maintenance of the energy network. This is approximately 20% of an overall annual cost. Without this contribution, it would not be possible to maintain and upgrade the network as required to keep up reliable distribution of gas and electricity.

Changes in wholesale prices for gas and electricity will be felt by consumers as suppliers have to raise their prices to absorb this cost. However, it is down to the supplier’s discretion as to how much they increase these prices by. Energy price caps have recently been introduced to prevent consumers from being outrageously overcharged, but a significant number of energy suppliers (including all of the Big Six) have since raised their prices to charge the absolute maximum amount.

This is why it’s important to review your energy tariff and ensure that you are getting the best deal for you. Many alternative providers, like Robin Hood Energy, have significantly cheaper tariffs available.

Get a quote online today to see how much you could save with Robin Hood Energy. Or why not give our friendly home energy advisors a call on 0800 030 4567. They’re here to help you find the best tariff and are available from 8am to 8pm Monday to Friday, and 9am to 5pm on Saturday.

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Please get in touch if you have any queries or complaints, and we will be happy to help you out with the information you need.