Energy Bills FAQ
What’s in an energy bill?
A bill is made up of the cost of buying energy (wholesale – the biggest component) and other costs suppliers have to pay such as network charges and policy costs, in addition to an allowance for operating costs etc. As a result, suppliers have no direct control over most of the costs that make up a bill and much of which is collected on behalf of other parties.
Why are energy bills so high?
The price of wholesale gas on the international market has rocketed to unprecedented levels over the past year, compounded by the Russian invasion of Ukraine. – At times prices have been 20 times higher than the levels seen at the start of 2021. In the UK, we are very dependent on gas for our heating (used in approx 85% of our homes) and gas also contributes around 40% of our electricity mix.
Gas is traded on an international market, so companies that buy and sell gas are subject to global prices. There are many factors that have contributed to the high price of gas including a cold winter last year leading to lower levels of storage, post-pandemic recovery demand from other areas of the world such as Asia. In addition, the war in Ukraine has added uncertainty about the supply of Russian gas to Europe. The high prices mean that companies buying gas have had to pay much more than usual to supply their customers, and therefore the incoming price cap has had to be increased by nearly £700 to cover these costs.
When might they start to decrease?
The price of gas remains volatile so it’s very difficult to make predictions with any accuracy. However it seems most likely that prices will remain high for the foreseeable future, not just because the cost of gas will remain high but also because some other costs are being deferred and will need to be recouped over a longer period.
How does the price cap work?
The price cap is the maximum amount an energy supplier can charge their customers. Ofgem, the energy regulator, updates the cap every six months (coming into force in April and October respectively) basing it on the various costs that suppliers face whilst ensuring that customers pay a fair price for their energy. It is important suppliers are able to recoup costs otherwise the market is simply not sustainable, however it is set at a level where suppliers make little or no profit. Even before the gas price crisis, most suppliers were making losses on domestic accounts.
It is not an absolute cap, so what you pay depends on how much you use and there can also be variations between different parts of the country. Ofgem estimates how much a typical dual fuel customer paying by direct debit would pay and uses this annual figure so it’s easier to understand and compare year on year. The new cap works out at £1,971 a year.
Why can’t energy suppliers absorb the costs?
The energy supply sector runs at a loss, with most suppliers not making any profit from their customers. This has been the case since before the pandemic.
The current volatility of international gas prices is a once-in-a-generation event. Companies cannot afford to supply electricity and gas to their customers for less than they have paid for it, so the cap has to reflect the true cost of energy.
Many energy suppliers have failed in recent months because they have been unable to cover their costs. This leads to higher bills for all of us because the market has to absorb the costs of taking on customers from the suppliers that exit the market.
Why are suppliers making such big profits when there is an energy crisis?
Where profits are announced these are reflective of the overall business activities of the company. As above, most suppliers that service domestic companies lose money in this part of the business, and have been since before the Covid-19 pandemic.
Energy companies need financial stability to ensure they are able to continue to generate and supply our energy, which is an essential service. This includes all aspects of the energy system, which continue to invest the necessary billions of pounds to ensure security of supply in the future.
What help is available for people who are struggling to pay their bills?
There is a range of help and support available for customers struggling with their bills so it is worth contacting your supplier to see what you might be entitled to. We anticipate high volumes of calls so people should take advantage of the range of methods to get in touch. The Government has also put in place a support package including a £150 Council Tax rebate and a £400 non-repayable discount to eligible households to help with rising energy bills. Consumer groups like Citizens Advice and debt advice charities can also help – many suppliers have partnership agreements with such groups. Suppliers have always provided extra support for vulnerable customers. Through the pandemic, energy suppliers provided hundreds of millions of pounds of extra support to customers and they will continue to do all they can to support all customers through these international price rises.
What happens when an energy supplier goes out of business?
Ofgem appoints a new supplier to take on the customers through its Supplier of Last Resort (SOLR) process so there is no interruption to customers’ supply, and no need for the customer to act.. However, this process does impose costs on other suppliers and customers. If the failed company is too large to be taken on by another supplier, it will go into the Special Administration Regime (SAR). This means that administrators and Government will take on the operation of the company including its liabilities and future energy needs to ensure that customers aren’t left without.
Why are costs added to bills when suppliers exit the market?
The energy market is not like a normal market, in that if companies exit the market the accounts of their customers must be picked up by another supplier, otherwise people would be left with no energy. Whichever supplier takes on the customers from a failed supplier has to purchase the energy they need to supply them at a time when wholesale costs are rocketing. So they need to be able to claim these back which is why these costs are added to bills. In addition, the new supplier has to honour things like credit balances and the failed supplier may have left other liabilities like payments to industry-wide schemes.
My supplier has increased my direct debit by way more than they need to.
Direct debits help to smooth payments so customers pay the same every month regardless of use. This means overpaying in summer when energy use is less, to help cover the winter when energy use is higher but the payment stays the same.
The payment amount is calculated using estimates and previous energy use, and also takes into account individual circumstances such as whether bills have been paid. Suppliers are required by Ofgem to ensure Direct Debit payments are reasonable so if you have concerns then contact your energy supplier in the first instance. There are also third parties such as Citizen’s Advice that may be able to advise
Why are standing charges going up as well?
Standing charges are costs which are paid irrespective of how much energy you use. These are to cover fixed costs that suppliers have to pay such as network charges, which is the cost of transporting the gas and electricity to your home. This is collected by energy suppliers through bills and then passed onto the companies that transport gas and electricity to your home (energy network companies). The most recent network charges have increased because of the costs arising from failed suppliers (see above) – these costs are added to the network charges on bills.
(See more detail on standing charges here). Network charges vary between regions - reflecting the different costs of transporting energy in different parts of GB. Suppliers have scope as to how they allocate costs between standing charges and unit rates but put together they cannot exceed the price cap. This explains why standing charges vary between suppliers. If the amount collected through standing charges was reduced then the unit cost would be higher and vice versa.
If this is related to gas prices, why is the cost of electricity going up as well?
We generate a lot of electricity through gas-fuelled power stations – roughly about 40%. So for now the price of gas remains a major factor in the price of electricity. However, as renewable energy forms more and more of our electricity mix, the percentage of gas will reduce and this will lower costs, as electricity from wind and solar is much cheaper than gas.
Why are prices high for people on ‘green’ energy tariffs?
Because gas is still a large proportion of the UK’s electricity mix, the wholesale cost of electricity is currently very much affected by the cost of gas. If you’re on a renewable tariff, then your supplier has committed to match the amount of energy you use with the amount of renewable power they purchase for you, but the actual electrons into your home are from the mix that’s on the grid. Your supplier has to purchase power from the grid and what’s on there at the time – which can vary markedly depending on the time of day or the year or the weather etc. As renewables form a larger part of the UK’s electricity mix, we will start to see the benefits of this cheaper power. Additionally, many people on renewable tariffs still use gas for heating – for which there are limited low carbon sources.