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Promoting choice and value
                             for all gas and electricity customers



Updated household energy bills
explained
Factsheet 98              16.01.13                                                              www.ofgem.gov.uk


Your household gas or electricity bill is                                                      Wholesale energy, supply
                                                                                               costs and profit margin
made up of a number of elements. The
                                                                                               Distribution charges
following pages give more information
about these, plus details of what you can                                                      Transmission charges
expect to find on your bill and how you
                                                                                               VAT
can make savings.
                                                                                               Environmental charges

                                                                                               Other costs


What makes up the typical energy bill?
Below are the breakdowns for gas and electricity bills. They reflect gas and electricity prices in December 2012. The
average gas bill for a standard for household gas and electricity bills.is £531. These prices are based prices in May 2012.
    Below are the breakdowns account is £811 and for electricity it They reflect gas and electricity on average annual
consumption figures, averaged across direct debit account is £704 and for electricity it is methods and averaged across
    The average gas bill for a standard all the former incumbent suppliers, all payment £470. These prices are based on
    average annual consumption figures, averaged across all the big six suppliers and averaged across Great Britain.
Great Britain.


      Gas                                                       Electricity
                       6%     4%
                                                                                          5%

                  5%                                                               11%
           2%

                                                                            5%

                                                                           4%
              16%

                                       67%                                                                58%

                                                                                16%




                        Wholesale energy, supply            Distribution charges            Transmission charges
                        costs and profit margin

                        VAT                                 Environmental charges           Other costs




The average bills above are based on average annual consumption figures of 3,300 kWh for electricity and 16,500 kWh for gas,
averaged across all big six suppliers and across Great Britain. Please note that the numbers may not sum to 100% due to rounding.
Updated Household energy bills explained
Factsheet 98                                                                                                 www.ofgem.gov.uk



   Element                    % of gas bill           % of electricity bill       Description

  Wholesale energy,          67%                     58%                          Wholesale energy: The cost of the gas or electricity.
  supply costs and                                                                Your energy supplier may buy this on the wholesale
  profit margin                                                                   market, or have a contract with a generator. Some
                                                                                  suppliers are also part of companies that generate
                                                                                  their own energy.
                                                                                  Supply costs: The costs associated with running a
                                                                                  retail sales business, including sales, billing etc.
                                                                                  Net margin: an indication of profitability made by the
                                                                                  supplier. See Ofgem’s weekly Supply Market Indicators
                                                                                  report for latest details: http://www.ofgem.gov.uk/
                                                                                  Markets/RetMkts/rmr/smr/Pages/indicators.aspx

  Distribution               16%                     16%                          The cost of building, maintaining and operating the
  charges                                                                         local gas pipes and electricity wires, which deliver
                                                                                  energy directly to your home.
                                                                                  Suppliers are charged for this, and pass on these costs
                                                                                  in the price they charge you for energy.

  Transmission               2%                      4%                           The cost of building, maintaining and operating the
  charges*                                                                        high pressure gas and high voltage transmission
                                                                                  networks.
                                                                                  Transmission companies charge users of these
                                                                                  networks and these costs trickle down to retail
                                                                                  customers.

  *Ofgem sets price controls, which limit the total amount of revenue that distribution and transmission companies can
  earn. We use a new regulatory model, RIIO, to get the best value for you, the end customer.

  VAT                        5%                      5%                           Value added tax.
                                                                                  Paid directly to HM Customs by supplier.

  Environmental              6%                      11%                          Government programmes to save energy, reduce
  costs                                                                           emissions and tackle climate change (see break down
                                                                                  opposite). Includes the cost of social programmes like
                                                                                  the Warm Homes Discount.

  Other costs                4%                      5%                           Extra costs covering meters (installation and
                                                                                  maintenance), storing gas and balancing the electricity
                                                                                  system.



Wholesale costs and supplier profit margin                               Suppliers buy electricity and gas either from the wholesale market,
                                                                         or directly from an electricity generator or gas producer. Some
This part of the bill will vary from supplier to supplier and customer   suppliers are part of companies which have their own generators /
to customer.                                                             producers.

Suppliers charge you a price for the gas and electricity that you        The energy sourced by suppliers is put directly into the
use. Ofgem does not set energy prices. Great Britain operates a          transmission system. Energy moves from the transmission system
competitive retail market framework, which allows suppliers to set       to the distribution system, and then into your home.
their own prices. But Ofgem does monitor suppliers’ prices and           It is the suppliers’ responsibility to make sure that the energy
profits.                                                                 they put into the transmission system matches the energy their
                                                                         customers use.
How suppliers source their energy
The actual gas and electricity that is delivered to your home is the
same, no matter which supplier you are with.
Updated Household energy bills explained
www.ofgem.gov.uk                                                                                                      Factsheet 98


Wholesale energy costs                                               Network charges
The cost of buying and producing electricity and gas are factored
                                                                     Ofgem sets price controls, which limit the total amount of
into your unit energy price and make up the largest part of your
                                                                     revenue that gas and electricity network companies can earn.
bill.
                                                                     We estimate that these companies need to invest over
Wholesale energy prices and the cost of fuel for electricity
                                                                     £30 billion in the next decade. This will:
generation can change frequently. Some energy is bought on
the day, but a large amount can be bought well in advance. It is     •	 upgrade and renew Britain’s gas and electricity networks
up to suppliers to balance their risk and make the best buying       •	 connect new sources of energy generation
choices they can, based on what they think their needs and costs
                                                                     •	 increase security of supply
may be in the future. This process is known as ‘hedging’.
                                                                     Ofgem has developed a new regulation model: RIIO (Revenue=
The value of the permits traded under the European Union
                                                                     Innovation + Incentives + Outputs).
Emissions Trading Scheme (EU ETS) have also increased the
costs of generating power. The EU ETS puts a price on pollution
                                                                     Our new approach pushes network companies to put customers
emitted by electricity generators and heavy industry and this
                                                                     and sustainability at the heart of everything they do. Companies
is automatically reflected in the wholesale price of power. Our
                                                                     will be rewarded for being efficient, innovative and responding
current estimate is that the EU ETS adds between £9-16 to the
                                                                     to the needs of customers. Companies which don’t meet these
wholesale power price.
                                                                     expectations will be penalised with reduced revenue.

Forward purchasing of energy by suppliers will tend to smooth
                                                                     This performance based model means that customers, who
the costs of energy passed on to customers. This keeps
                                                                     will bear a large part of the cost of the investment, will get the
consumer prices from rising and falling as frequently. Wholesale
                                                                     necessary investment at a fair price.
prices fluctuate daily, but in the past we have seen suppliers
change retail prices around once or twice a year.

Suppliers’ costs and profit margin
                                                                     Environmental costs
Suppliers incur costs from billing, sales, customer service and      The government has put a number of environmental
all the other activities that make up a retail business. There are   programmes in place. These give energy companies targets for
also different costs associated with supplying different types of    reducing carbon emissions. These are not itemised levies on your
tariff. So the price that suppliers charge should also reflect the   bill, but currently amount to around £82 on an annual bill. They
costs associated with that particular tariff. Suppliers take into    do impact on the price suppliers charge you for your electricity
consideration all their costs (as outlined in our bill breakdown),   and gas. However, some of these programmes will actually help
then decide on a pricing strategy, to compete for customers in       save you money on your bill.
the market.
                                                                     These programmes (which are administered by Ofgem) are:
Ofgem publishes regular supply market reports which detail
the relationship between suppliers’ energy and non-energy            Energy Company Obligation (ECO): A new domestic energy
costs and retail prices. Following our 2008 Energy Supply            efficiency programme designed to create a legal obligation
Probe we brought in new rules that mean suppliers have to            on certain energy suppliers to improve the energy efficiency
publish separate financial information on supply costs and           of domestic households. ECO is estimated to cost a typical
profit. In August 2012 we published our decision on changes          consumer £27 per fuel each year.
to the Segmental Statements, which are intended to improve
the transparency and cross-company comparability of the              The Renewables Obligation: A Government support
information. The 2011 results have been prepared by suppliers        mechanism for promoting large scale renewable electricity
under the revised guidelines. To view the results please visit:      projects in the UK. Ofgem’s estimate is that the cost of this
http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/              scheme this year is £21 out of your electricity bill (there is no
Reporting%202011%20Results%20Overview%20text.pdf                     impact on your gas bill for this programme). The cost of this
                                                                     scheme is expected to increase in April 2013.

                                                                     Feed-in-Tariffs: Supports the switch from oil and gas fired
                                                                     heating systems to sustainable sources such as bio fuels, solar
                                                                     thermal panels, heat pumps and renewable combined heat and
                                                                     power. Ofgem estimates the cost of this programme is £6 out
                                                                     of your electricity bill (there is no impact on your gas bill for this
                                                                     programme).
Updated Household energy bills explained
Factsheet 98                                                                                                www.ofgem.gov.uk


How you can save money on your bills                                    and what help is available from both suppliers and Government if
                                                                        you are struggling to pay your energy bills.
No matter which supplier you are with, or which tariff you are on,
                                                                        •	 shopping around for the best energy deal
you should be able to take actions to reduce your gas or electricity
bill.                                                                   •	 how to be energy efficient
                                                                        •	 avoiding debt and disconnection
Payment Methods                                                         •	 dealing with sales people
You may be able to save money on your energy bills by prompt            •	 how to make a complaint
payment or by opting to pay by direct debit – more than half of
                                                                        •	 getting help with your energy bills
consumers pay this way. Speak to your energy supplier about
possible savings. Ofgem has produced a factsheet with more              •	 more money in your pocket – consumers talking about the
information about direct debits: http://www.ofgem.gov.uk/Media/            savings they have made thanks to Energy Best Deal
FactSheets/Documents1/direct_debit_leaflet_oct_2012_WEB.pdf
                                                                        The campaign works by holding practical presentations delivered
Energy Efficiency                                                       to low income consumers and front-line staff who work with
                                                                        people at risk of fuel poverty. The campaign is run in England,
You could look at energy efficiency measures, such as loft
                                                                        Wales and Scotland by our partners.
insulation, or a more efficient boiler. Some of the environmental
programmes that you pay for through your bill mean that your
                                                                        For further information on Energy Best Deal, including written
supplier can offer you help and advice. So take advantage of this
                                                                        information on how to get the best deal for your circumstances,
by asking your supplier what they can do to help.
                                                                        visit the consumer section of the Ofgem website.
Some suppliers have their own energy efficiency helplines. The
                                                                        Switching supplier or tariff
Energy Saving Trust can also give you advice on energy efficiency:
0800 512 012                                                            You can save money on your bills by switching supplier. If you
                                                                        want to switch you can use a price comparison site to see which
In January 2013 the Department for Energy and Climate Change            deals may be cheaper. When you do this make sure you have a
is launching the Green Deal. The Green Deal enables many                recent bill or your annual energy statement to hand. Suppliers
households and businesses to improve the energy efficiency of           are obliged by Ofgem to provide customers with annual energy
their properties. This scheme lets consumers pay for some or            statements which set out the key facts about their energy use.
all of the improvements over time through their electricity bill.       They also provide important information about the deal you are
For further information on The Green Deal please visit: http://         currently on. Using your bill and annual statement will help you
www.decc.gov.uk/assets/decc/11/tackling-climate-change/green-           make accurate comparisons with any alternative offer. However,
deal/6634-the-green-deal-a-new-way-to-pay.pdf                           if you prefer to stay with your current supplier you could talk to
                                                                        them to see if they have any cheaper tariffs than the one you are
Meter Readings                                                          currently on.
You should regularly do your own meter readings, if at all possible.
                                                                        Ofgem’s current investigation into the energy supply market found
This will ensure that your supplier charges you for the actual
                                                                        that there are now around 900 tariffs available, which makes
amount of energy you have used.
                                                                        it difficult for consumers to compare them. We are proposing
                                                                        a package of reforms to make it easier for people to compare
Energy Best Deal
                                                                        tariffs. This includes simplifying tariffs to help consumers more
Ofgem and Citizens Advice have been working together since              easily identify the best deal for them, rules to ensure suppliers
2008 developing and delivering consumer advice through the              treat customers fairly and ensuring information suppliers send
Energy Best Deal campaign.                                              consumers is in a clear and easily understood format.

We have produced a series of seven short films covering the
scheme’s key messages - how you can reduce your energy costs



  For public enquiries contact:

  Consumer Affairs team	                                         020 7901 7295	               email: consumeraffairs@ofgem.gov.uk



  For media enquiries contact:

  Lydia Fitzpatrick, Senior Communications Manager	              020 7901 7419	               email: lydia.fitzpatrick@ofgem.gov.uk
  Chris Lock, Senior Press Officer	                              020 7901 7225	               email: chris.lock@ofgem.gov.uk

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Household energy bills explained (OFGEM, 2013)

  • 1. Promoting choice and value for all gas and electricity customers Updated household energy bills explained Factsheet 98 16.01.13 www.ofgem.gov.uk Your household gas or electricity bill is Wholesale energy, supply costs and profit margin made up of a number of elements. The Distribution charges following pages give more information about these, plus details of what you can Transmission charges expect to find on your bill and how you VAT can make savings. Environmental charges Other costs What makes up the typical energy bill? Below are the breakdowns for gas and electricity bills. They reflect gas and electricity prices in December 2012. The average gas bill for a standard for household gas and electricity bills.is £531. These prices are based prices in May 2012. Below are the breakdowns account is £811 and for electricity it They reflect gas and electricity on average annual consumption figures, averaged across direct debit account is £704 and for electricity it is methods and averaged across The average gas bill for a standard all the former incumbent suppliers, all payment £470. These prices are based on average annual consumption figures, averaged across all the big six suppliers and averaged across Great Britain. Great Britain. Gas Electricity 6% 4% 5% 5% 11% 2% 5% 4% 16% 67% 58% 16% Wholesale energy, supply Distribution charges Transmission charges costs and profit margin VAT Environmental charges Other costs The average bills above are based on average annual consumption figures of 3,300 kWh for electricity and 16,500 kWh for gas, averaged across all big six suppliers and across Great Britain. Please note that the numbers may not sum to 100% due to rounding.
  • 2. Updated Household energy bills explained Factsheet 98 www.ofgem.gov.uk Element % of gas bill % of electricity bill Description Wholesale energy, 67% 58% Wholesale energy: The cost of the gas or electricity. supply costs and Your energy supplier may buy this on the wholesale profit margin market, or have a contract with a generator. Some suppliers are also part of companies that generate their own energy. Supply costs: The costs associated with running a retail sales business, including sales, billing etc. Net margin: an indication of profitability made by the supplier. See Ofgem’s weekly Supply Market Indicators report for latest details: http://www.ofgem.gov.uk/ Markets/RetMkts/rmr/smr/Pages/indicators.aspx Distribution 16% 16% The cost of building, maintaining and operating the charges local gas pipes and electricity wires, which deliver energy directly to your home. Suppliers are charged for this, and pass on these costs in the price they charge you for energy. Transmission 2% 4% The cost of building, maintaining and operating the charges* high pressure gas and high voltage transmission networks. Transmission companies charge users of these networks and these costs trickle down to retail customers. *Ofgem sets price controls, which limit the total amount of revenue that distribution and transmission companies can earn. We use a new regulatory model, RIIO, to get the best value for you, the end customer. VAT 5% 5% Value added tax. Paid directly to HM Customs by supplier. Environmental 6% 11% Government programmes to save energy, reduce costs emissions and tackle climate change (see break down opposite). Includes the cost of social programmes like the Warm Homes Discount. Other costs 4% 5% Extra costs covering meters (installation and maintenance), storing gas and balancing the electricity system. Wholesale costs and supplier profit margin Suppliers buy electricity and gas either from the wholesale market, or directly from an electricity generator or gas producer. Some This part of the bill will vary from supplier to supplier and customer suppliers are part of companies which have their own generators / to customer. producers. Suppliers charge you a price for the gas and electricity that you The energy sourced by suppliers is put directly into the use. Ofgem does not set energy prices. Great Britain operates a transmission system. Energy moves from the transmission system competitive retail market framework, which allows suppliers to set to the distribution system, and then into your home. their own prices. But Ofgem does monitor suppliers’ prices and It is the suppliers’ responsibility to make sure that the energy profits. they put into the transmission system matches the energy their customers use. How suppliers source their energy The actual gas and electricity that is delivered to your home is the same, no matter which supplier you are with.
  • 3. Updated Household energy bills explained www.ofgem.gov.uk Factsheet 98 Wholesale energy costs Network charges The cost of buying and producing electricity and gas are factored Ofgem sets price controls, which limit the total amount of into your unit energy price and make up the largest part of your revenue that gas and electricity network companies can earn. bill. We estimate that these companies need to invest over Wholesale energy prices and the cost of fuel for electricity £30 billion in the next decade. This will: generation can change frequently. Some energy is bought on the day, but a large amount can be bought well in advance. It is • upgrade and renew Britain’s gas and electricity networks up to suppliers to balance their risk and make the best buying • connect new sources of energy generation choices they can, based on what they think their needs and costs • increase security of supply may be in the future. This process is known as ‘hedging’. Ofgem has developed a new regulation model: RIIO (Revenue= The value of the permits traded under the European Union Innovation + Incentives + Outputs). Emissions Trading Scheme (EU ETS) have also increased the costs of generating power. The EU ETS puts a price on pollution Our new approach pushes network companies to put customers emitted by electricity generators and heavy industry and this and sustainability at the heart of everything they do. Companies is automatically reflected in the wholesale price of power. Our will be rewarded for being efficient, innovative and responding current estimate is that the EU ETS adds between £9-16 to the to the needs of customers. Companies which don’t meet these wholesale power price. expectations will be penalised with reduced revenue. Forward purchasing of energy by suppliers will tend to smooth This performance based model means that customers, who the costs of energy passed on to customers. This keeps will bear a large part of the cost of the investment, will get the consumer prices from rising and falling as frequently. Wholesale necessary investment at a fair price. prices fluctuate daily, but in the past we have seen suppliers change retail prices around once or twice a year. Suppliers’ costs and profit margin Environmental costs Suppliers incur costs from billing, sales, customer service and The government has put a number of environmental all the other activities that make up a retail business. There are programmes in place. These give energy companies targets for also different costs associated with supplying different types of reducing carbon emissions. These are not itemised levies on your tariff. So the price that suppliers charge should also reflect the bill, but currently amount to around £82 on an annual bill. They costs associated with that particular tariff. Suppliers take into do impact on the price suppliers charge you for your electricity consideration all their costs (as outlined in our bill breakdown), and gas. However, some of these programmes will actually help then decide on a pricing strategy, to compete for customers in save you money on your bill. the market. These programmes (which are administered by Ofgem) are: Ofgem publishes regular supply market reports which detail the relationship between suppliers’ energy and non-energy Energy Company Obligation (ECO): A new domestic energy costs and retail prices. Following our 2008 Energy Supply efficiency programme designed to create a legal obligation Probe we brought in new rules that mean suppliers have to on certain energy suppliers to improve the energy efficiency publish separate financial information on supply costs and of domestic households. ECO is estimated to cost a typical profit. In August 2012 we published our decision on changes consumer £27 per fuel each year. to the Segmental Statements, which are intended to improve the transparency and cross-company comparability of the The Renewables Obligation: A Government support information. The 2011 results have been prepared by suppliers mechanism for promoting large scale renewable electricity under the revised guidelines. To view the results please visit: projects in the UK. Ofgem’s estimate is that the cost of this http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/ scheme this year is £21 out of your electricity bill (there is no Reporting%202011%20Results%20Overview%20text.pdf impact on your gas bill for this programme). The cost of this scheme is expected to increase in April 2013. Feed-in-Tariffs: Supports the switch from oil and gas fired heating systems to sustainable sources such as bio fuels, solar thermal panels, heat pumps and renewable combined heat and power. Ofgem estimates the cost of this programme is £6 out of your electricity bill (there is no impact on your gas bill for this programme).
  • 4. Updated Household energy bills explained Factsheet 98 www.ofgem.gov.uk How you can save money on your bills and what help is available from both suppliers and Government if you are struggling to pay your energy bills. No matter which supplier you are with, or which tariff you are on, • shopping around for the best energy deal you should be able to take actions to reduce your gas or electricity bill. • how to be energy efficient • avoiding debt and disconnection Payment Methods • dealing with sales people You may be able to save money on your energy bills by prompt • how to make a complaint payment or by opting to pay by direct debit – more than half of • getting help with your energy bills consumers pay this way. Speak to your energy supplier about possible savings. Ofgem has produced a factsheet with more • more money in your pocket – consumers talking about the information about direct debits: http://www.ofgem.gov.uk/Media/ savings they have made thanks to Energy Best Deal FactSheets/Documents1/direct_debit_leaflet_oct_2012_WEB.pdf The campaign works by holding practical presentations delivered Energy Efficiency to low income consumers and front-line staff who work with people at risk of fuel poverty. The campaign is run in England, You could look at energy efficiency measures, such as loft Wales and Scotland by our partners. insulation, or a more efficient boiler. Some of the environmental programmes that you pay for through your bill mean that your For further information on Energy Best Deal, including written supplier can offer you help and advice. So take advantage of this information on how to get the best deal for your circumstances, by asking your supplier what they can do to help. visit the consumer section of the Ofgem website. Some suppliers have their own energy efficiency helplines. The Switching supplier or tariff Energy Saving Trust can also give you advice on energy efficiency: 0800 512 012 You can save money on your bills by switching supplier. If you want to switch you can use a price comparison site to see which In January 2013 the Department for Energy and Climate Change deals may be cheaper. When you do this make sure you have a is launching the Green Deal. The Green Deal enables many recent bill or your annual energy statement to hand. Suppliers households and businesses to improve the energy efficiency of are obliged by Ofgem to provide customers with annual energy their properties. This scheme lets consumers pay for some or statements which set out the key facts about their energy use. all of the improvements over time through their electricity bill. They also provide important information about the deal you are For further information on The Green Deal please visit: http:// currently on. Using your bill and annual statement will help you www.decc.gov.uk/assets/decc/11/tackling-climate-change/green- make accurate comparisons with any alternative offer. However, deal/6634-the-green-deal-a-new-way-to-pay.pdf if you prefer to stay with your current supplier you could talk to them to see if they have any cheaper tariffs than the one you are Meter Readings currently on. You should regularly do your own meter readings, if at all possible. Ofgem’s current investigation into the energy supply market found This will ensure that your supplier charges you for the actual that there are now around 900 tariffs available, which makes amount of energy you have used. it difficult for consumers to compare them. We are proposing a package of reforms to make it easier for people to compare Energy Best Deal tariffs. This includes simplifying tariffs to help consumers more Ofgem and Citizens Advice have been working together since easily identify the best deal for them, rules to ensure suppliers 2008 developing and delivering consumer advice through the treat customers fairly and ensuring information suppliers send Energy Best Deal campaign. consumers is in a clear and easily understood format. We have produced a series of seven short films covering the scheme’s key messages - how you can reduce your energy costs For public enquiries contact: Consumer Affairs team 020 7901 7295 email: consumeraffairs@ofgem.gov.uk For media enquiries contact: Lydia Fitzpatrick, Senior Communications Manager 020 7901 7419 email: lydia.fitzpatrick@ofgem.gov.uk Chris Lock, Senior Press Officer 020 7901 7225 email: chris.lock@ofgem.gov.uk