Energy bills are made up of several components, but most domestic tariffs are structured with a unit rate (p/kWh) and a daily standing charge. Whilst you can't see all of the components that make up energy costs on your bill, they are included within your unit rates and standing charges. Let's break this down...
What components make up energy costs?
Energy costs are made up of wholesale costs, network charges and VAT.
That’s what you pay for the energy bought to supply your home, and makes up around a third of your total bill. Energy is bought from electricity generators and gas producers on the wholesale market and prices fluctuate daily with events across the globe. Supply and demand can affect prices, with lower demand and high electricity availability meaning lower prices. Other global events have a big impact on wholesale prices, for example Russia's invasion of Ukraine and the threat to restrict gas supply to Europe.
The costs to pay for the cables or pipes that carry energy across the country into your home. Network companies charge your supplier an Ofgem-regulated price for use of the network, and this goes towards maintaining, running and upgrading the networks. In addition, part of these costs are for ‘balancing services’ – balancing supply and demand second by second – this accounts for around 1.5% of the average household electricity bill.
Environmental and Social Obligation Costs
Larger suppliers have to help pay for government energy policies. These costs cover schemes such as to support energy efficiency improvements in homes and businesses, to help vulnerable people and encourage take-up of renewable technology.
When suppliers set their prices they have to cover their operating costs, things like customer service and billing, as well as make a profit.
That leaves VAT, which is 5% for households and finally some other direct costs which cover costs for things like third-party services, such as meter maintenance, installations and wider smart metering programme costs.
To find out why energy prices can vary depending on where you live see here.