Understanding Gas and Electricity bills Costs included in your electricity and gas bills

There are different costs included in your gas and or electricity bill. These are: 

• Unit rates
• Standing charges
• Taxes, such as VAT

The Unit rate is the rate charged per unit of energy you use. It is measured in kilowatt hours (kWh).

The Standing charge is a rate charged daily that covers the costs to provide a supply to a property. This can include costs such as those used to maintain the energy supply network, take meter readings, and support governmental social and environmental schemes.

These are the costs you pay for the energy bought to supply your home or business.

• On average wholesale costs make up the largest component of an energy bill.
• Suppliers buy energy from electricity generators and gas producers on the wholesale market. 
• Prices on the wholesale market can go up and down very quickly and depend on what’s happening globally with fuels like gas, oil, coal and increasingly renewable fuels. 
• Demand also affects price. Wholesale prices are generally lower when demand is low and fuel availability is high. They rise when the opposite is the case.
• For fixed term contracts suppliers often buy energy in advance for their customers. In a rising market this can give consumers protection from the market prices for the duration of the contract.
• For other types of flexible contracts, out of contract and deemed rates the wholesale price (and market volatility) can have a more immediate impact.

Network costs

These costs are for the gas pipes and electricity cables that carry energy across the country into your home or business.

• Network companies charge your supplier, via the relevant shipper for Gas, an Ofgem-regulated price for their use of the energy network. This money goes towards maintaining, running and upgrading the networks.
• Network costs vary year to year. For example, to reflect usage or how we need to allocate costs on different parts of the network. 
• Network costs include ‘balancing’ charges. Supply and demand is balanced second-by-second for electricity and daily for gas. These charges vary over time.

Social and environmental obligation costs

• Depending on how many customers they supply, suppliers have to help pay for government energy policies such as the Warm Home Discount scheme, Feed in Tariff and Energy Company Obligation.
• These costs could cover schemes to support energy efficiency improvements in homes and businesses, help vulnerable people and encourage take-up of renewable technology.
• Environmental policies include charges such as the Green Gas Levy and the Renewable Obligation which help to promote cleaner generation and are part of the Governments Net Zero strategy.

Other operating costs

These cover costs for things like:

• Third-party services, such as sales commissions and brokerage
• The majority of energy contracts that are arranged by a broker will include an energy broker fee in the price you pay per kWh.
• The broker tends to set this in agreement with the energy supplier. This is usually charged on a per-unit basis, but sometimes standing charges will be used when dealing with SMEs.
• The broker commission should be clearly and accurately outlined within contracts by the brokers, so it is specified how much is going on the energy and how much is going to commission.
• Meter maintenance, rental and installations
• Administration from industry code parties, data and settlement services which suppliers have to be party to as part of their licence. These include companies such as the Retail Energy code, Elexon and Xoserve 
• Wider smart metering programme costs
• Supplier operational costs cover things like customer service, billing and the general costs of running an energy business. 

Tax costs

There are two main types of tax that are applicable to energy bills

• VAT (Value Added Tax)
• VAT will be charged at the standard rate, which is currently 20%. However, a reduced rate applies to businesses that use less than 4,397 kWh per month and some organisations, such as certain charities, will qualify for an exemption.
• More information on VAT can be found here
• CCL (climate change levy)
• The Climate Change Levy (CCL) is an environmental tax charged on the energy that businesses use. A means of encouraging businesses to be more energy efficient in how they operate, the CCL aims to reduce the overall emissions that businesses produce. 
• CCL is paid at either the main rate or Carbon Price Support (CPS) rate and will be charged on a per kilowatt-hour basis
• More information on CCL can be found here