The wholesale market is a series of buyers and sellers, the sellers being the generators and the buyers being the suppliers.
The suppliers have a 'demand' for energy based on their portfolio of customers and how and when those customers use their energy.
Some suppliers need to buy all their energy in the wholesale market, and therefore are exposed to market risk on all their trades, whereas others, with generation capacity, only need to buy a portion of their energy this way.
Generators have a 'supply' of energy from their plants. The volume that they produce is dependent on when and for how long their plants are operating.
Depending on the source of generation and the amount produced, the price at which the generator is willing to offer their product differs greatly. The generator can sell this energy to their associated supply business or they can choose to 'auction' any spare capacity on the market for any supplier to purchase.
Between the two parties, the generator and the supplier, a bilateral agreement needs to be struck for:
- The total amount of energy needed
- The period over which it is needed to be delivered
- The shape of the energy (or in other words when they need it and how much they need at each given point) and
- The cost
In every individual bilateral contract these terms can and do vary greatly.
Raw energy is one of the fundamental drivers of the unit price paid for energy, to find our more about the energy price visit our guides to What Makes Up the Electricity Price and What makes up the Gas Price.
And to understand more about the volatility of the market, visit our How Energy Prices Move Over Time guide.