Understanding the UK Electricity Market: What Drives Energy Prices for Businesses

1. Introduction

Electricity is a fundamental input cost for every business, yet few understand how its price is determined. Over the past few years, UK businesses have seen unprecedented volatility in their energy bills, driven by a combination of market, regulatory, and geopolitical factors.

This paper explains how electricity is bought and sold, why prices rise and fall, and what business owners can and cannot control when it comes to their energy costs.

2. How the Electricity Supply Chain Works

Electricity passes through several hands before it reaches your premises. Consumers-both residential and commercial-purchase electricity in the retail market from a supplier, sometimes via a broker. That supplier buys electricity from generators in the wholesale market and arranges for it to be delivered through the National Grid and local Distribution Network Operators (DNOs).

Historically, the UK relied on large centralised power stations-coal, gas, and nuclear-connected directly to the high-voltage transmission network. Power flowed one way, from the power station to homes and businesses.

Since the early 2010s, however, government incentives such as the Feed-in Tariff (FIT) have encouraged small-scale renewable generation. Today, roughly 29% of generation capacity is classed as embedded generation, meaning it connects to local distribution networks instead of the transmission grid.

 Figure 1. Electricity supply diagram

An easy analogy is the road network:

• The transmission network is like the motorway system—high-capacity and national.
• The distribution network is like A and B roads—smaller and local.

3. What Makes Up the Price You Pay

Your electricity bill covers two broad categories:

1. Commodity costs – the wholesale cost of the electricity itself.
2. Non-commodity costs – everything else: network operation, government levies, environmental schemes, and supplier margins.

On average, non-commodity charges make up around three-quarters of a business electricity bill. These include charges for using the grid, subsidies for renewable energy, and fixed daily fees.

Figure 2. Example breakdown of an electricity bill

4. Wholesale vs Retail Price

In the wholesale market, electricity suppliers and generators trade in 30-minute blocks. Prices change constantly-higher during periods of strong demand or low renewable generation, lower when the grid is well supplied.

The retail price paid by a business is an average of these volatile wholesale prices plus all non-commodity charges. Retail prices are therefore much smoother and respond to market trends with a delay.

Figure 3. Wholesale market trends over the last 10 years (Source: Statista)

5. Why Prices Are Volatile

Wholesale prices are highly sensitive to short-term and long-term factors:

• Weather: Demand peaks on cold, dark evenings when renewables may produce less power.
• Gas prices: Because gas-fired plants often set the “marginal” electricity price, the cost of gas heavily influences the wholesale electricity price.
• Geopolitics: Events such as Russia’s invasion of Ukraine and post-COVID market shifts have caused major spikes in gas and electricity prices.
• Renewables: While wind and solar reduce average prices when available, they also add variability depending on generation conditions.

Non-commodity costs, by contrast, are more stable and set annually by regulators. These charges are indexed to inflation and published in advance, allowing better forecasting.

Figure 4: Wholesale market volatility by half hour for the week commencing 25^th April 2024 (Source: Nordpool)

Figure 5: Non-commodity costs have steadily increased since 2010.

6. The Importance of Timing

The single most influential factor on your electricity cost is when your supplier buys energy on your behalf.

Wholesale markets are traded months or years ahead. If your supplier purchases energy when market prices are high, that cost is locked into your fixed contract. For example:

• If a company bought its winter 2024 electricity on 22 August 2023, the baseload price was about £140/MWh.
• Waiting until 26 February 2024 would have halved that cost to £70/MWh.

That’s a 7 p/kWh (50%) difference purely based on timing.

Figure 6: Electricity UK Baseload price variation over time for forward contracts

This makes comparing energy costs between businesses or sites difficult-one site’s contract may have been signed when the market was twice as expensive as another’s.

For that reason, every business should review its energy procurement strategy to ensure purchases are timed as effectively as possible.

7. Non-Commodity Charges Explained

While you can’t avoid these charges, understanding them helps explain regional and supplier price differences.

• DUoS Charges (Distribution Use of System):
  • Consumption-based: Higher rates apply during weekday peak hours (typically 4–7 p.m.).
  • Capacity-based: Fixed daily charge based on your reserved network capacity. Exceeding this limit can incur penalties.
  • Voltage level: Higher-voltage connections usually pay higher fixed but lower variable rates.
• REGO Certificates: Proof that your electricity comes from renewable sources. Purchased separately, their market price varies with demand for green energy credentials.
• Supplier Margin: Covers the supplier’s risk and administrative costs. Suppliers forecast your demand and buy ahead; errors can incur penalties, so margins vary between suppliers.

8. Geographical Variations

Electricity prices also depend on where your business operates.
Regional “postcode lottery” pricing stems from:

1. How much energy suppliers sell and buy in that region.
2. The local network’s delivery and maintenance costs.
3. DNO charges that differ by area.

For example, comparing two locations in England such as Thurrock and Wigan, the same business could pay around 5% more for electricity in one location purely because of regional network differences.

Unfortunately, these are fixed costs beyond customers’ control.

Figure 7: UK map showing variations in charges across the country  with London as the base case

9. What This Means for Businesses

Understanding the factors behind your electricity costs can help you make smarter decisions.
While no business can control global gas prices or government levies, you can manage:

• Contract timing: Engage early and monitor wholesale trends before locking in.
• Load profile: Shift energy use away from peak hours where feasible.
• Procurement approach: Work with brokers or consultants who use data-driven purchasing strategies.
• ESG goals: Decide whether green tariffs or REGOs align with your sustainability strategy and budget.

The more informed your decisions, the better you can protect your business from price shocks.

10. Conclusion

Electricity pricing in the UK is complex-shaped by global fuel markets, local network costs, and national policy decisions.
For SME owners, the key takeaway is that timing and awareness matter. By understanding what drives electricity prices and planning procurement strategically, businesses can reduce risk, control costs, and support a more sustainable energy future.

R2G can help you navigate the landscape and support you on your procurement journey- get in touch today!

© 2025 R2G LIMITED. All rights reserved | Website by Creativefive | Company number: 15826171 | Registered address: The Office, Gothic House, Barker Gate, Nottingham NG1 1JU | info@r2g.co.uk