How the retail market works
Energy retail suppliers buy electricity and gas in the wholesale market and sell it on to customers.
Suppliers also pay for balancing services, network use, social and environmental policies, including delivery of the Government energy efficiency scheme ECO and the Warm Home Discount Scheme to eligible customers.
They operate under strict licence conditions from the energy regulator, Ofgem.
The retail market is competitive, with people and businesses able to switch supplier based on price and service. Profit margins are small and less than those in most other industries such as supermarkets. Indeed, many suppliers in recent years have been loss-making.
The domestic price cap, which is set by Ofgem, limits the amount that suppliers can charge domestic customers on variable tariffs. The price cap does not apply to fixed tariffs.
Rules that energy suppliers have to follow
Ofgem – the energy regulator – is responsible for regulating the energy industry and sets the rules that the companies must follow, from licence conditions to setting the price cap.
Licence conditions – regulation set by Ofgem which sets out the standards across many different areas from operations to customer service, that suppliers must adhere to, to continue to operate.
Price cap – sets a maximum amount that energy retail suppliers can charge domestic customers on Standard Variable or Default Tariffs.
Different kinds of meters
Different types of meters exist which can affect how and when you pay, as well as how much you pay. These include:
Where people are billed for their energy after they have used it, based on estimates or actual use.
Prepayment meters (PPM)
Where people put money on their account before using energy rather than receiving bills for their usage. PPMs allow people to manage their energy use and finances more closely than waiting for quarterly or monthly bills.
PPMs can also be smart, and are increasingly so.
Which send regular readings of energy use automatically to suppliers, so people receive bills based on actual use, without having to give readings. Smart meters can operate in credit or prepayment mode. For more information on smart meters visit https://www.smartenergygb.org
Paying by direct debit means you’ll have regular, usually monthly payments taken from your account by your supplier to pay for your energy usage.
Costs are calculated by your supplier by estimating your yearly usage and spreading this over 12 equal monthly payments. This helps to smooth the amount you pay over the course of a year, instead of paying different amounts in summer and winter, when you might use more or less energy.
Payments may be made in advance or in arrears. This is often a popular payment method since suppliers can provide discounts for customers paying via Direct Debit because this method involves less admin and management required from suppliers. Suppliers can return funds if you are over paying and also review your direct debit throughout the year to ensure it covers your usage.
Payment on receipt of bill (Monthly or quarterly credit)
You can choose to pay your energy bills on receipt of them.
Payments can be made over the phone, by cash or cheque, or online. It is your responsibility to remember to pay on time, and unless you take regular meter readings then bills will still be based on estimated usage.
Unfortunately, energy suppliers don’t offer discounts for customers paying upon receipt so your bills will be higher than if you were making Direct Debit payments, or pay-as-you-go (PPM).
Pay as you go (PPM)
You can also pay for your energy via a Pre-Payment Meter (PPM).
This means you pay upfront for your gas and electricity, by either topping up online if you have a smart PPM, or topping up a key/ card at a Post Office / PayZone or Paypoint.
PPMs have been a way of helping customers monitor and budget their energy usage. They are also required to try and prevent indebted customers falling into arrears and reducing the risk of bad debt that must ultimately be recouped through households’ bills.
PPM tariffs are cheaper than tariffs for customer paying on receipt of bills but often more expensive than Direct Debit. This is because it costs suppliers more to provide energy to this type of meter.
The UK government announced in March 2023 that it would work to equalise the cost of prepayment and Direct Debit tariffs.