Have you ever thought of the actual breakdown of your energy charges and why it can change so much year-on-year?
The energy cost you pay for on your bill is a combination of a multitude of charges, each can change, and does, with each underpinned by its own market volatility.
As a result the headline price you pay can fluctuate wildly year on year and indeed day on day.
The energy itself
The wholesale cost of the energy makes up a large proportion of your overall price at around 57%.
Below is a breakdown of the other costs that make up your energy bills:
15% covers the cost of transporting the energy from A to B
Otherwise known as transmission and distribution, this cost varies by the area of the country that the customer is based – the further away from the generation point you are the more it costs to transport your energy. This charge typically increases year-on-year to cover both the upkeep and replacement of the transportation facilities.
7% covers Losses
Due to the inefficient nature of energy transmission, you pay for more energy than you actually use. This is because energy is naturally lost en route, and our ageing UK network does not help this unavoidable loss, indeed it exacerbates it.
1.5% covers various industry charges
Management of the network, which facilitates energy supply, needs to be paid for. These charges are passed on to the customer and with the current plans underway to shake up the industry; this charge could continue to rise.
3.5% covers government initiatives
Various energy related government initiatives are included in your bill, and regardless of who supplies your energy and how much you use, the impact is the same. Whether it is the Supplier Renewable Obligation or the Feed-In Tariff scheme that part of the cost of the energy you use goes towards to future renewable sustainability. Paying for tomorrow from today’s bill.
The Climate Change Levy is another addition to the overall bill, but this is listed separately on your bill, and is levied on top of the cost of the energy you use.
8% covers the cost of metering
This is traditionally represented in the standing charge on your bill. The cost ensures you have capacity in the wires to deliver your energy and to maintain your meter. This ensures it’s performing efficiently and not over or under measuring your usage.
And finally, around 8% goes in as supplier gross margin
Suppliers are businesses too, and need to cover their marketing costs, acquisition costs and administration costs. This implies a headline gross margin of 8% for the supplier, however, depending on their structure this can look very different – for instance, a vertically integrated business will have the opportunity to make a profit on both the wholesale and retail sides of their business.
Overall, whether it’s the cost of generation, the cost of government or the cost of upkeep, energy bills are subject to a myriad of commercial pressures and as the UK energy market prepares for an overhaul of sources, supply and capacity these costs will inevitably be rising.
You can’t avoid these costs, but you can make sure that where a price is competitive, you take the deal, and if possible lock in that price for an extended period to avoid the volatility of the coming years.