What is my Electricity Bill made up of?
Consumer electricity bills are always a hot topic of conversation. There is a general misunderstanding or lack of knowledge over what makes up our personal energy bills. The average electricity bill in the UK is roughly £612. The below table highlights the different areas and associated % costs of the average electricity bill:
Wholesale Costs (32.32%): Wholesale costs are those associated with buying the electricity needed to supply your home. Potential routes that suppliers can buy electricity are via trading exchanges (ICE & APX), through bilateral contracts with other parties or through Power Purchase Agreements (PPA’s) directly with asset owners. The cost generally reflects the cost of producing the power (fuel costs, maintenance of assets etc) plus a mark-up for having trading desk functionality, systems, staff and membership costs for trading exchanges etc.
Network costs (23.15%): Network costs are those associated with the infrastructure required to allow electricity to travel around the country to the point of need (pylons, substations, transformers etc). Also included in network costs are the costs National Grid ESO incur ensuring the network is balanced (i.e. supply equals demand) and that the network operates within a required range of frequency.
Operating costs (17.34%): Operating costs are those associated with the billing process, IT systems and customer service teams.
Environmental and social obligation costs (23.15%): these costs are associated with government initiatives aimed at improving energy efficiency, reducing emissions and encouraging the uptake of renewable generation. Examples include the ‘Warm Home Discount’ and ‘Feed-In Tariffs’.
VAT (4.7%): Value Added Tax is applied to all customer electricity bills.
Supplier pre-tax margin (0.73%): This is the profit margin for suppliers, which helps them sustain their business and employ a large number of workers across the UK.
Other direct costs (1.25%): This accounts for the costs associated with being a participant in the market (potential smart metering costs and data communication requirement costs).