Energy UK, and its members, are committed to a well-functioning retail market which produces fair outcomes for consumers.
We welcome greater transparency over energy costs and the component parts of an energy bill.
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 change 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 depending on how and when an individual energy company buys its energy, and if you have a gas only bill, an electricity only bill or a dual fuel bill.
The information below is based on Ofgem data and outlines the key costs of the customer energy bills in 2016 based on the audited accounts of the six largest energy suppliers.
|Breakdown of a typical dual fuel bill
|Environmental and social obligation costs
|Other direct costs
|Supplier pre-tax margin
What are these 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.
Electricity and gas must be distributed from source to end user. This is done by transmission and distribution networks which are run by different companies. 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.
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.
Environmental and social policy costs
Government has programmes to ensure security of energy supply (the Capacity Market), deliver lower carbon electricity (Contracts for Difference, Feed-in Tariffs, and the Renewables Obligation) and energy efficient homes (Energy Company Obligation, elements of the smart meter programme) and provide direct financial support to the fuel poor (Warm Home Discount) that are levied onto customer bills.
These policies can also help households save money (several £100s in some cases) on their energy bills.
- The Energy Company Obligation The Energy Company Obligation can deliver significant bill savings for eligible households taking up subsidised heat and insulation measures. The Energy Saving Trust estimates that a typical semi-detached house could save around £140 per year from roof and loft insulation, and £155 from cavity wall insulation. These savings can more than outweigh the total costs of policies on bills. To find out more and to see if you might be eligible, visit the Ofgem website.
- The Warm Home Discount delivers a £140 discount off the annual electricity bills of eligible low-income households. To find out if you’re eligible, and how to claim, visit the GOV.UK website.
- The rollout of new Smart Meters will bring an end to estimated billing, and give energy users real-time information about their energy use to enable them to make more efficient energy choices. They will also help reduce the costs to suppliers associated with billing and metering, and make the process of switching tariffs easier and quicker. Every energy supplier will be providing smart meters to their customers between now and 2020. To find out your energy supplier’s rollout plan, visit their website. Alternatively, the Smart Energy GB website will provide this information for a range of suppliers.
- The Feed-in-Tariff scheme pays out to households and businesses who have installed eligible small-scale low-carbon electricity generation technologies (such as solar panels) for all electricity they generate and export to the grid. These households and business will also save money from generating their own electricity. To find out more about the scheme, including how to apply, visit the Ofgem website.
- Programmes to support investment in low-carbon electricity generation and security of supply are designed to deliver cleaner and more reliable energy supplies to households and businesses, but also have the effect of driving down market electricity prices and reducing costly price volatility. The government previously estimated this could amount to an average saving of around £5 per household in 2014.
In addition, there are minimum efficiency standards for gas boilers and energy using appliances (such as fridges, washing machines, TVs etc.) which have helped households and businesses save money on their energy bills through the natural replacement of these items. The Energy Saving Trust estimates that a replacing an old D-G rated gas boiler with a new A-rated boiler could save a typical semi-detached house between £85 and £215 per year. The government also previously estimated that the savings from more efficient energy using appliances amounted to an average saving of around £41 per household in 2014.