As the first of the Big 6 energy suppliers announces another price increase, we asked Good Energy’s trading team to explain some of the factors which have been affecting underlying wholesale prices:

Recent months have seen tremendous volatility in wholesale energy prices, driven by a variety of different factors. In the first quarter of 2011, spot oil prices reached their highest levels since August 2008, peaking at $127 per barrel.  This was caused by a combination of factors: not only geo-political tensions in Libya and the Middle East pressurising oil supply but also increases in demand from consumers in China and India, and weakness in the US dollar. The Fukushima nuclear accident in Japan also increased demand for gas, which is a significant proportion of the UK electricity fuel mix and whose price is linked to oil. The result is that spot UK baseload power followed a similar upward trend to oil prices, rising from around £32/MWh in mid-2010 to above £80/MWh early in 2011.

However, recently oil has fallen to around $113 per barrel due to a slowing US economy and concerns that Greece will default on its debt repayments.  This bearish sentiment has fed through to spot UK baseload power which now stands at around £50 /MWh.

This summer, the International Energy Agency forecasts there may be a further fall in UK baseload prices amid expected higher seasonal temperatures and reports of slowing world growth in demand for oil and gas due to high prices at the pump.

Looking at the longer-term forward market, power prices are continuing their upward trend, underpinned by a mixture of factors.  Japan is expected to continue to import more gas, and there is uncertainty about the need to replace aging nuclear power plants in the UK.