020-8102-9898

Why does energy cost as much as it does?

Posted on by VHL Team

Payment due on energy bill

They say that there are two certainties in life: death and taxes. But it also seems that you can count on the cost of energy to rise year after year after year. So with the cost of energy constantly playing on our minds, why exactly does energy cost as much as it does? What exactly are you getting for your money each time you pay your energy bill?

Breaking down the costs, according to…

NERA Economic Consulting

Figures from NERA Economic Consulting state that the breakdown of the average energy bill is:

  • 45% for the cost of the gas or electricity
  • 40% for transport, distribution and running costs
  • 15% for environmental charges, metering, VAT and profit

Ofgem

The energy regulator Ofgem breaks the cost down further into the following percentages for a typical dual fuel bill in the UK:

  • 42% for the wholesale cost of the gas and electricity
  • 23% for network costs
  • 14% for supplier operating costs
  • 9% for pre-tax margin
  • 7% for environmental and social costs
  • 5% for VAT

Scottish Power

Scottish Power have provided the following breakdown of an average dual fuel bill:

  • 41% for the wholesale cost of the gas and electricity
  • 26% for delivery of the energy to your home
  • 12% for customer service
  • 11% for environmental levies
  • 5% for VAT
  • 5% for profit

So what exactly do I get from these services?

With the overall cost breakdown of your bill, it makes sense to look into each individual section in more detail to find out what you are getting for your money.

The following is taken from Scottish Power’s energy bill breakdown.

Cost of energy

This is the is basic cost of the gas and electricity itself and is the wholesale price of the energy charged to the marked by energy producers. Gas and electricity suppliers purchase energy in advance to ensure that it is there when you need it. This also allows them to charge a more consistent flat rate for the energy, as wholesale prices can fluctuate greatly from day to day.

Delivery of the energy to your home

The 26% quoted for delivery costs is broken down into the following:

  • 9% for distribution costs: This is the cost paid to the relevant distribution network operator for transporting energy along their networks to the customers
  • 3% for electricity transportation: This is the cost paid by the energy supplier to the National Grid for transporting the energy to a local distribution company
  • 14% for gas transportation: This is the cost paid by the energy supplier to the gas transportation companies for transporting gas from its source to the end user

Customer service

The 12% quoted for customer service includes:

  • The cost of leasing and maintaining meters
  • Billing, account and data management
  • Cash collection
  • Customer service support

Green levies

All energy suppliers are obliged to meet certain obligations, the cost of which is included in the 11% quoted within a customer’s energy bill. These account for:

  • 4% for ROC: This is an obligation to obtain a certain percentage of electricity from renewable sources
  • 3% for ECO: Energy Company Obligation provides energy efficiency support to low income and vulnerable consumers and ‘hard to treat’ properties
  • 2% for Carbon Tax: This is a government levy on carbon emitted as a result of the generation of electricity, aiming to reduce UK carbon emissions.
  • 1% for Feed In Tariff:This is an obligation for meeting the cost of small-scale renewable and low carbon generation technologies based on our share of the UK supply
  • 1% for WHD: Warm Home Discount is a support programme for households living in, or at risk of, fuel poverty, providing rebates on electricity

How can I keep my energy bills down?

If you are looking to reduce your energy bills, the best thing to do is to reduce your energy consumption and waste. VHL have posted a number of articles on the topic, including:

Energy efficient boiler

Heating your home makes up around 55% of your total energy bills, so it is important to consider the benefits of an energy efficient boiler and its impact on both your bank balance and the environment. Upgrading your current boiler to a newer energy efficient model can save you a lot of money in the long-run. Our article Is your boiler really energy efficient? discusses this in more detail.

Energy performance certificates

An Energy Performance Certificate (or EPC) is a document detailing the efficiency, usage and typical costs of a property’s energy. It also contains recommendations to improve the property’s energy use for improved efficiency and to save money. Following the suggestions made on your EPC can help you to save money on your energy bills over time. Take a look at our Energy Performance Certificates guide for more information.

Small changes can add up to big savings

There are numerous ways that you can cut heating costs around your home by making small changes. VHL’s articles on this topic include:

These and other useful energy saving articles can be found in the Energy Saving section of our Help & Advice centre.