01 Wholesale
Day-ahead and within-day energy
Bilateral trading on EPEX SPOT, N2EX, and over-the-counter. Sets the spot price of 1 MWh for a given half hour.
Markets
Five markets, one price on the bill. How wholesale, balancing, capacity, CfD and ancillary fit together.
Great Britain does not have an electricity market. It has at least five, operating on different timescales with different rules, all feeding into the single number a household sees on a bill. This route traces what each market procures, who participates, and why the 2024 REMA consultation is reopening the question of whether this architecture still fits.
06Route 6 of 12 · Markets and consumersAfter this route you will be able to
- Name the five wholesale-and-wholesale-adjacent markets that make a GB electricity bill.
- Explain the day-ahead and within-day timescales, and who buys and sells on each.
- Describe what the Capacity Market and Contracts for Difference are designed to protect.
- Trace how an £11,500 annual gas bill breaks down between wholesale, network, policy and supplier costs.
- Make a reasoned call on locational marginal pricing versus the current national price.
26 August 2022Day-ahead gas settles at 540 p/therm · all-time record
The 2022 energy crisis proved the markets worked. That was also the problem.
In the last week of August 2022, GB day-ahead gas prices hit
The markets did exactly what they were designed to do. Generators dispatched in merit order. The Balancing Mechanism cleared. Suppliers hedged, within limits. Interconnectors flowed the right way. Ofgem adjusted the default tariff cap every three months. By any measure of mechanical function, the system held.
But 29 retail suppliers failed, mostly smaller entrants without adequate hedging. The Supplier of Last Resort process ran 29 times in 18 months, each time with socialised cost. Consumer bills more than doubled. The Chancellor introduced the
The wholesale market passed the price signal through cleanly. The consumer-facing market could not absorb it. What is the right amount of insulation between wholesale volatility and retail prices, and who pays for it?
Reading this question starts with the architecture. Five markets, five procurement windows, one bill.
Section 01 · The five markets
Wholesale, balancing, capacity, CfD, ancillary.
Each market procures a different thing on a different timescale. The five combined produce the final cost stack a supplier bills a customer.
02 Balancing
Balancing Mechanism (BM)
NESO accepts bids and offers to adjust dispatch every half hour. Run by Elexon, settled through BMRS.
03 Capacity
Capacity Market
Pay-to-be-available auction. T-4 procures four years ahead, T-1 one year ahead. Covers stress events with three-hour notice.
04 Low-carbon support
Contracts for Difference (CfD)
Long-term price support for low-carbon generators. Strike price minus reference market price. Competitive auctions every 12 to 24 months.
05 Ancillary services
Ancillary and Response
Frequency response (Dynamic Containment, Dynamic Moderation, Dynamic Regulation), reactive power, black start. Procured by NESO.
Section 02 · What a bill contains
Wholesale is about 35 percent of a typical bill.
A Q2 2026 default-tariff-cap bill for 2,900 kWh of electricity is roughly £770 per year. The headline number hides a stack of different costs, each set by a different mechanism.
Wholesale energy
34 %
Network charges
21 %
Policy and social
17 %
Operating costs
14 %
VAT and margin
14 %
Source: Ofgem default tariff cap Q2 2026 explanatory paper. Annual bill basis at 2,900 kWh / typical domestic consumption.
Common misconception
Renewable subsidies are the biggest driver of the consumer bill.
Policy and social costs are about 17 percent of a typical bill, and only a fraction of that is renewable support. Wholesale, network and operating costs account for around 70 percent combined. The narrative that green levies dominate the bill is a quarter of the whole.
Section 03 · REMA
The 2024 review is asking whether the architecture still fits.
The Review of Electricity Market Arrangements (REMA) is a DESNZ-led consultation that began in 2022 and entered its second decision phase in 2024. It is the biggest re-examination of GB electricity market design since the 1990 privatisation.
The core REMA question is whether a single national wholesale price still serves a system where generation is clustered in the north and demand is clustered in the south. The current design sets one price for a half hour across the whole country. Locational marginal pricing (LMP) would set different prices at different network nodes, reflecting the physical cost of getting power to each node.
The case for LMP: £2 billion per year of constraint costs (paying Scottish wind to turn off, paying Kent gas to turn on) are a direct consequence of national pricing. LMP would signal to generators where to locate and to batteries when to arbitrage.
The case against: LMP means households in different regions pay different prices. It is a politically large change with winners and losers that do not align neatly with fuel-poverty boundaries. Some of the constraint cost could be addressed through faster transmission build or zonal pricing (a compromise between national and full LMP).
DESNZ's REMA Phase 2 decision is expected in mid-2025 with implementation (if any) from 2027. The current working assumption is zonal pricing, with three or four zones, rather than full LMP.
Reforms must be considered in the context of investor confidence, consumer protection, delivery complexity and the need to align with Clean Power 2030. Any change to the wholesale market must be implemented through an orderly transition that protects existing investment commitments.
DESNZ, REMA Phase 2 Consultation Response summary, March 2024
Section 04 · The zonal call
National, zonal, or locational. Pick a pricing architecture.
Three options are on the table. Each has different costs, benefits and political footprints.
Check your understanding
Three questions on what you have just read.
Key takeaways
- Five markets run in parallel: wholesale, Balancing Mechanism, Capacity Market, Contracts for Difference, ancillary services.
- A typical GB electricity bill is 34 % wholesale, 21 % network, 17 % policy, 14 % operating costs, 14 % VAT and margin.
- The 2022 crisis revealed that the wholesale market passed prices through cleanly. The retail market failed because smaller suppliers were not hedged.
- REMA Phase 2 is the biggest market redesign since 1990. The working assumption in 2024 was zonal pricing, not full LMP.
- The £2 bn/yr constraint cost is the symptom that is driving the structural debate. That number grows toward £8 bn/yr by 2030 without reform.
References
- DESNZ: Review of Electricity Market Arrangements (REMA)
Phase 2 consultation response, March 2024.
Primary source for market reform direction.
- Ofgem: Default tariff cap
Quarterly cap methodology and breakdown.
Source for bill breakdown.
- NESO: Capacity Market
T-4 and T-1 auction results, capacity procured.
Capacity Market authoritative reference.
- Low Carbon Contracts Company
CfD contract administration, AR-round clearing prices.
CfD counterparty of record.
- Elexon BMRS
Half-hourly wholesale and balancing data.
Live market transparency.
The next route opens governance. Where the decisions about these markets are actually made.