This document provides an analysis of the dynamic between the residential retail market and wholesale energy markets. It explains the importance of structural wholesale positions against retail market tariffs in dictating margin, and pays particular attention to the role of the market leader in setting retail margins.

• An analysis of the dynamic between the retail and the wholesale UK energy markets.
• An analysis of how retailers with wholesale supplies can decide to record margin in either retail of wholesale operations.
• An explanation of how Centrica's wholesale position and transfer pricing approach affects all other retailers that supply gas at a loss to customers.


Highlights



Although competition has been intense, the regional electricity incumbents and Centrica retain a high level of market power, setting the prevailing margins for all retailers through respective Tier 1 tariffs.





Competing suppliers have to price off the ex-monopoly rather than the underlying costs of wholesale gas or power, resulting in only Centrica recording positive gas retail margins.





Centrica has historically aimed to protect retail margin through higher tariffs, as it could not fully recover margin in the wholesale business, but it has now altered this approach, dictating lower overall margins for retailers this winter.



Reasons to Purchase


• Gain insight into how the retail and wholesale positions of energy companies influence margin when supplying residential energy customers.
• Understand that margins are dictated by the market leader in balancing its retail and wholesale positions.