The wholesale cost is the actual cost of the energy itself and currently makes up 36% of a typical electricity bill and 46% of a typical gas bill.

For gas this is essentially the wholesale price that suppliers pay on the market. In contrast, the wholesale cost of electricity is more complex. 

Electricity is generated in a number of ways – burning gas and biomass, using nuclear reactors or capturing energy from renewable sources such as the sun or wind (2).

While some of these forms of generation use a fuel that has a direct cost (gas, biomass, nuclear), there is no ‘fuel’ for renewable generation. Instead, the ’wholesale’ price for renewable electricity mostly reflects the costs of building the equipment that generates the power – the wind turbines and solar panels. 

The wholesale cost of electricity also includes the cost of supporting these renewable investments. The government’s “Contracts for Difference” scheme (CfDs) guarantees a minimum price that generation companies will be paid for the electricity they produce, even if prices created by the market fall below. The money for ‘topping up’ prices is collected by the companies supplying electricity through consumers’ electricity bills. If prices rise above the guaranteed price, generators pay back the difference to the fund. 

Another added part of the wholesale cost of electricity is the cost of ensuring that there is enough spare capacity when needed. Electricity supply and demand fluctuate over time, so there’s always a risk that demand could exceed supply, leading to blackouts. To prevent this, some companies are paid to maintain capacity that can be activated during demand spikes. This system is known as the Capacity Market, and the cost of maintaining this reserve is also added to consumer electricity bills.