The voice of the energy industry

Energy bill breakdown

What am I paying for?

Public scrutiny of energy costs can generate more heat than light. Debate in recent years has done little to help understand what drives energy prices.

Energy UK believe that it would be in the interests of everyone – consumers, media, government, regulator and companies – for there to be a common understanding of how different types of costs influence a consumer’s energy bill. Inevitably, different interests will have differing perspectives on what drives those costs or whether they are efficient, but agreement on the basic composition of the bill would aid constructive debate.

We asked PwC to produce a robust methodology for weighting the different elements of a bill and to track how those elements have changed over recent years. Read PwC's methodology here.

Treatment of supplier margins

These graphics do not include detail of supplier margins. Ofgem identify the average margin for larger suppliers to be around 4%. This figure is derived from the audited Consolidated Segmental Accounts that the larger suppliers have to lodge with Ofgem each year. We regard this to be the most robust, independently verified, figure for supplier profits.

Component costs

There are five essential components which contribute to a consumer’s energy bill: wholesale costs, network costs, policy costs, operating costs and VAT. These costs move over time. In particular, while the proportion of the bill spent on wholesale costs has fallen over the last five years, the share of other component parts has increased. At different times each area may put upward or downward pressure on consumer bills.

This is one reason why people often ask why retail prices do not exactly follow the movement in wholesale costs.

Also, the impact of these different cost elements will vary if you have a gas only bill, an electricity only bill or a dual fuel bill. For example, if you are an electricity only customer, policy costs will be 20% of your bill compared to only 6% of a gas only bill.

The analysis below covers the key costs of the customer energy bill, therefore profits are not shown in this analysis. According to the audited accounts of the six  largest energy suppliers profit has averaged 4% since 2010.

Wholesale costs

To supply consumers, energy companies must first purchase electricity and gas on the wholesale market. They may be bought directly from the market or through contracts with electricity generators or gas producers. Energy can be purchased months or even years in advance.
The proportion of wholesale costs on an average dual fuel bill has fallen from 54% in 2010-11 to 34% in 2016-17.

Network costs

Electricity and gas must be distributed from source to end user.  The wire and pipe networks need to deliver a reliable flow of energy to British homes and businesses and to connect new energy sources. Energy suppliers are charged for their use of these networks.
The proportion of network costs have increased on an average dual fuel bill from 23% in 2010-11 to 29% in 2016-17.

Operational costs

Despite companies driving out inefficiency, their relative contribution rises as wholesale costs fall. These are the costs of running of a retail energy company; metering operations, building rents and providing customer service.
These costs have risen from 14% of an average dual fuel bill in 2010-11 to 18% in 2016-17.

Environmental and social policy costs

Government has programmes to ensure security of supply, deliver lower carbon electricity (Capacity Market, Contracts for Difference, Feed-in Tariffs, Renewables Obligation) and energy efficient homes, particularly for the fuel poor (Energy Company Obligation, Warm Homes Discount, elements of the smart meter programme).

These policy interventions promote low carbon generation and help consumers to reduce their bills. You can find out more here.
Costs for these government policies on an average dual fuel bill have increased from 4% in 2010-11 to 13% in 2016-17.

Consumer bills in 2016/17

Trends in consumer bills in 2010/11 - 2016/17

 

 

Energy UK Small