The energy market is one of the largest global markets on the planet. It is a system of huge importance in our day-to-day lives and for the planet’s future. But how much do we really know about how it works?

Here we'll run through 5 big questions about the UK energy market, break down who is involved in every transaction and what this means for businesses and generators today. We’ll also take a look at where the current system falls short and what we can do to build a fairer, more sustainable energy future.

What is the energy wholesale market? 

The energy wholesale market is where energy suppliers buy electricity from energy generators and sell it on to consumers. 

However, these transactions are anything but simple. The process involves a complex chain with many stages and intermediaries along the way.

In fact, the average energy transaction passes through 7 different hands to get from generator to consumer – with each taking their own cut at every step. And it means that consumers typically pay 35% more for their energy than what generators sell it for.

This is because the wholesale market was originally set up to handle the trading of fossil fuels like oil, gas, and coal – physical commodities that are expensive to extract, store and transport, with many parties needed to manage the process.

It was built for a different era, but as renewable energy sources like wind and solar play a growing role in the energy mix, it’s becoming clear that it’s a system that no longer serves the future.

How is the energy wholesale market structured?

The energy market relies on three main types of intermediary parties that are involved in the buying and selling of energy. They are:

Brokers

Energy brokers play an important role in connecting businesses and generators with the right energy contracts. They help simplify the complex process of buying energy for all parties.

Many brokers offer guidance and help businesses prioritise what matters most to them when it comes to their energy —be it cost efficiency, reliable service, or sustainability, charging a fee for their expertise and services. 

Utilities

The utility supplier is the registered entity that facilitates the purchase or sale of energy for businesses and generators. These are the companies that most of us have heard of, like EDF, Octopus and British Gas.

In most cases, utilities will use external trading desks to offer a fixed price for all the electricity a business uses or a generator produces. They handle things like customer service, billing, and payments.

However, as they’re squeezed between fees on both the broker and trading desk side, they work on the lowest margins of any intermediary in this space. It’s no wonder that, to remain profitable, these utilities often allocate minimal funds to the customer experience, earning a reputation for poor customer service.

Trading desks

Working similarly to financial markets, these traders buy and sell energy from the wholesale market in large volumes. They play an important role in risk management and can make huge profits by taking bets on the energy they buy based on their market predictions. When things like geopolitical events disrupt energy production or distribution, it raises the risks of buying, often leading to a significant increase in prices.

This is where the majority of money is made in energy transactions, with many of the biggest energy companies like Shell, ExxonMobil and BP having in-house trading desks.

When times are good for the trading desk, they keep all their profits between what they bought and sold the energy for. But when times are tough, they push the losses back to the consumer, forcing them to pay more for their energy. 

There has been no greater example of this in action than the 2022 energy crisis, which saw hundreds of thousands of UK businesses closing their doors whilst Big Energy made record profits.

What does the energy market mean for the renewable energy transition?

​​For the UK to progress towards its ambitious goal of Net Zero by 2050, we need to increase the use of renewable energy significantly. A key driver of this change will be the increased adoption of clean power by businesses. 

So why aren’t businesses doing more to support the transition to renewable energy sources? 

There might be the will, but there's not the way. Our research shows that one major barrier stands above the rest: cost. 

Over half of all UK business owners (52%) believe that transitioning to cleaner energy sources would increase their bills. And this makes sense given that 69% believe that renewable energy should cost the same or more than fossil fuels.

However, without the inefficiencies of the wholesale market, the nominal cost of the renewable electron could be a fraction of the cost of a fossil fuel one, as clean energy sources are inherently free – after all, nobody owns the wind or the sun! 

What’s more, a lack of transparency within the energy system is also hindering the transition to renewables. Our research found that 37% of UK businesses are unaware of the origins of their energy, and one in three report that utility providers fail to disclose energy sources clearly.

Giving businesses the power of choice would likely accelerate the adoption of renewables. But this isn’t possible in the current system because today’s market setup keeps renewable electrons coupled with fossil fuel ones, essentially lumping clean and dirty energy into one big lucky dip. This means even businesses on "green" energy tariffs are likely to find a significant proportion of fossil fuel power hidden within the small print of their energy bill.

What are REGOs in the UK energy market?

The only way that utilities today can legally claim 100% renewable energy is to offset the use of fossil fuels by purchasing a Renewable Energy Generation Origin certificate scheme (REGOs) on behalf of the customer. The cost of this is usually passed on, at a premium, in their monthly bill.

Buying these certificates allows businesses to offset their energy usage with renewable production, but their consumption isn’t directly matched with the power they relate to. It means what they are essentially buying is the “renewable-ness” of that power, not the electricity itself. This prevents businesses from directly transacting with low-carbon energy producers – which would not only be cleaner, but cheaper. 

What are the alternatives to buying energy from the wholesale market? 

Currently, 99% of UK businesses buy their energy through a market that leaves them facing hidden fees, volatility, poor service, and no guarantee of renewable energy. So what are the alternatives to the wholesale market that exist today? 

Onsite generation

One option for businesses is to generate their own renewable electricity. But for many, the big upfront expense of building and installing these renewable technologies can be a major hurdle.

And for businesses that do manage to implement on-site renewable energy systems, relying on intermittent energy sources such as wind and solar means they still need to be connected to the grid to keep a consistent power supply.

Power Purchase Agreements

Another solution is to transact directly with the generators themselves. Currently, corporate Purchase Power Agreements provide a way to do this through long-term contracts drawn up directly between businesses and renewable generators. 

However, in such a complex system, these agreements run to hundreds of pages, take months to negotiate, and cost hundreds of thousands of pounds.

What’s more, because the business needs to be able to buy all of the energy that a generator produces, it only works for really large businesses with huge amounts of energy usage. And even then, it’s very difficult to match a single business’s consumption with a renewable generator’s output exactly.

This is fine if you’re a megacorporation like Google or Amazon – but what about the other 99% of businesses? 

Introducing Renewable Energy Direct

It’s clear that the energy market is overdue for a change. Today’s system, tied to fossil fuel commodities that it was initially set up to trade, is driven by speculation over geopolitical issues rather than true supply and demand. 

This volatility benefits people working in trading firms while everyday businesses shoulder the cost of unexpected price jumps. Which is why, if we’re to solve both the energy and climate crises, we need an entirely new approach to energy transactions.

Renewable Energy Direct (RED) is tem.’s alternative to buying and selling through the wholesale market. Instead of relying on the network of middlemen, RED™ helps businesses to buy their energy directly from renewable energy generators. It means better, fairer prices for businesses and generators.

Businesses won’t need to change how they shop for energy or pay their bill. And the best part – they can trace exactly where their energy comes from, right down to the half-hour.

A bright RED future

Renewable Energy Direct (RED) reduces costs on every bill, makes it possible to trace every half-hour of energy purchased and see every step of your energy transaction.

At the other end, RED also puts more money back into the pockets of renewable generators, incentivising investment in the sector. You can calculate exactly how much of your money is going to renewable generators, and exactly which generators it is going to.

At tem., we’re committed to enabling any business to run on affordable renewable energy traceable down to the megawatt. If you are ready to switch to RED, get started here today.