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Bill Breakdown

Monday, September 1, 2014

Over the past few years there has been increasing coverage in the news about energy bills: prices going up, social subsidies, green subsidies, wholesale prices, profit margins…to name but a few. Often when we get our energy bill, be it gas or electricity, we are drawn to the headline number that which we have been charged over the bill period. But, how do we get to that number? Obviously the more units of energy we use the higher the bill. But, the total cost is the number of units used multiplied by the unit cost energy. What makes up the unit cost?

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The obvious answer is the cost of the fuel used in the power stations where your electricity is generated be that gas, coal, nuclear….or renewables such as wind. Also we must include the development costs of the power station, the personnel costs associated with this and others. In the case of wind and other renewables there is no fuel cost, but considerable investment in the installation (I am sure this is another topic that we shall cover in the near future). This cost is called the wholesale cost. The wholesale cost, being the obvious one, makes up only about 45% of your total1…so where does the rest come from?

The next most significant cost is the ‘network cost’this is split between the National Grid, which manages the high voltage lines which distribute power nationally from power plants to local regions, and the local network distributors. More information about these companies have been covered in one of my previous blog posts.

For every £1 on your bill 7p is due to environmental and social costs which have been implemented by The Government. There are a number of programmes which these cover but there intention is to increase the transition to low-carbon power generation and support renewable energy, and also for social purposes such as the Warm Homes Discount which offers up to a £140 discount off the electricity bills of eligible pensioners.

The costs incurred by the company supplying your electricity, approximately 13% of your bill, includes the costs of running the customer services centres, the general administration cost and costs incurred from customers in arrears or default of payment.

Tax is charged on you energy bill, in the form of VAT, and this is levied at 5%. And, this then leaves potentially the most controversial of all the wedges we have discussed…your energy suppliers profit margin. This profit margin has become highly controversial of later and is something we shall discuss in a future blog post.

  • Andrew Timmis
  • Posted by
    Andrew Timmis
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