Energy bills are made up of a number of different costs. They’re not just the gas and electricity you use. Our Energy Specialists have broken down all the elements and explained what goes into making your energy bill.
Changes in wholesale energy costs cause suppliers to raise or reduce prices accordingly. Wholesale costs are how much a supplier, like us, has to pay to get the gas and electricity to sell on to you. When supply is high and demand is low, prices are generally lower. But when demand rises and there’s less availability, wholesale prices rise.
Consequently wholesale costs have more than doubled since April 2021 because the demand is high and the supply is low.
Suppliers are charged for the costs of maintaining and using the network (National Grid) of cables and pipes that carry energy to your home. These ‘standing charges’ are passed on to you through your bills. But because network charges may vary from year to year, this is another factor that affects the size of your gas and electricity bills.
Green levy, environmental & social costs.
Larger suppliers, like E.ON Next, have to help pay for government energy policies. These costs cover schemes to support improvements like solar power and wind farms. The money is also used to help the vulnerable and to develop new technology. As part of the government's Energy Price Guarantee (Sept 8 2022) some of these elements have temporarily been removed from domestic bills.
Operational costs cover things such as customer services, the processing of bills and the general admin costs of running an energy supplier company.
VAT is the value-added tax paid on household energy bills and is set by the government. VAT for residential bills is currently set at 5%.
Earnings before tax.
This is our operating profit. This is the overall earnings before deducting interest, tax and other costs.
Other direct costs.
This is the amount paid to third-party services, meter maintenance and installations. It also includes administration from data and settlement services like Elexon and Xoserve. Finally a percentage is used on wider smart metering programme costs.
Why do energy prices change?
The cost of energy changes with the fluctuation of wholesale gas prices (all energy types are connected to this price, including renewables). The government introduced a regular price cap (2019) to make sure that consumers paid a fair unit price for energy, it was not an absolute cap on their bills. The energy price cap was a limit on the unit rate we can charge on the price for your energy per kWh, if you’re on a variable plan. It also sets the standing charge – this is the amount you pay per day to stay connected to the grid (covering the costs for things like power lines and pipes). The cap depends on how much energy is costing wholesale and is regularly reviewed by Ofgem.
Throughout 2022 there has been a sharp increase in the cost of wholesale gas which has led to big increases in the price cap set by Ofgem. However, to combat this, the government announced on 8 September 2022 a new scheme called the Energy Price Guarantee that will protect customers from future rises in the price cap. The EPG sets a new unit rate, higher than April’s price cap but lower than October’s. It means that the new average price for customers is around £2,500. Customers need to be aware that this is not an absolute cap on their bills, it is an average that the government has worked out. If you use more energy than you would do normally, you will pay more than the EPG threshold.
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