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Understanding Costs Involved In Your Energy Bill

Understanding what costs go into that dreaded bill that arrives on our doormats can be confusing, and although we might sometimes feel as though the costs are plucked out of thin air, there are numerous factors that are taken into account. Below is a breakdown of what costs are involved in a dual fuel bill so you know exactly where your hard earned pennies are going and why.

The first cost we come across are “commodity costs” which are known as wholesale costs and stand for the prices energy companies pay for the gas and electricity that is supplied to you. These markets can vary every day, with prices being very variable depending on what is happening in various parts of the world where this energy is sourced. Energy companies tend to source their energy in advance in portions so as to try and keep a better average of prices. This also enables them to ensure that bills don’t rise and fall with as much volatility as the wholesale costs do. An example of where the wholesale cost affects customer prices would be petrol, as this move with the market prices.

The costs involved in the transportation of electricity and gas around the country are known as network costs. These costs are derived from usage of the system as well as the insurance for an energy company that enough energy is going to be supplied to their customers. These costs are divided to local distribution networks and the National Grid. The National Grid is paid for transporting the gas and electricity through their gas pipes and large pylons, whilst the local distribution network is paid to reduce the voltage of the electricity to the amount that we use in our homes. They also distribute the gas to homes through smaller pipes and wires. Recent years have seen an increase to these costs due to the increasing demand for energy, with the networks having to be upgraded or built to meet these demands.

Energy Supplier Costs

These costs are also included in your bill for the operations carried out by your energy supplier. These are the maintenance of gas and electricity metres, the reading of these and the costs involved in managing your accounts.

This is also where they obtain their profits and ensure that they will be able to continue investing billions of pounds in renewable energy, the construction of new power stations and to meet costs of all their previous investments.

Government Costs

These costs are derived from various payments including VAT, tax and environmental and social schemes and amount for around 16% of your energy bill. Environmental costs include those costs that are built up through supporting renewable technology; for example, the Feed in Tariff that is provided for those who have solar panels installed on their roofs. It also includes the cost of the schemes that energy suppliers are obligated to provide in order to improve Britain’s energy efficiency and to reduce the cost of energy bills.

Other costs included are for government social schemes; including the Warm Home Discount which is given to vulnerable customers who may struggle to meet energy bill costs. The cost of the government’s carbon floor price and the EU emissions trading scheme costs for carbon are also added in.

Over the past three years these costs have increased dramatically, which is why it is important that energy companies continue to work with the government to look at the ways in which energy bills can be reduced. This involves creating and developing new social and environmental schemes that energy companies will be able to provide.

Example Energy Bill & the Costs Involved

Let’s say your energy bill (for gas and electricity) was £989, below is an estimated calculation of what costs go where:
43.2% will be used for the wholesale energy costs = £427
23.2% will be used for the network costs = £229
12.4% pays for the operating costs of your supplier = £122
16.4% are taken for government costs = £162
(This 16.4% is broken down into: 2% for renewables support; 7% for energy efficiency schemes; 0.9% for social programmes; 0.6% for feed in tariffs; 1.2% for the cost of carbon and 5% for VAT.)
4.8% is used by the supplier as profit = £47
*These figures are based on an average npower dual fuel energy bill – March 2013.

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