Energy bills are never far from the headlines at the moment, as hard-pressed households struggle to stretch their budgets in the wake of massive price hikes.
Families were dealt a double blow at the beginning of the month, when the increase in the energy price cap - the maximum companies are allowed to charge - increased the cost of the fuel and the standing charge users pay every day. And more is on the way, with energy analysts predicting a further jump later in October, which could add a further £600 to the average bill.
Energy bosses have called for more Government support for households facing a 'truly horrific' winter, with as many as four in 10 people potentially falling into fuel poverty before the end of the year. Bosses from E.ON, EDF, Scottish Power, and Centrica (which owns British Gas) were quizzed by MPs on their efforts to support customers with rising energy bills, after complaints that suppliers were forcing people onto more expensive variable tariffs.
Read more: What is the energy price cap and why is it in the news?
Michael Lewis, chief executive of E.ON, said up to 40 per cent of households could be in fuel poverty from October, if Ofgem increases the cap once again. He told MPs his firm was 'expecting a severe impact on customers' ability to pay,' adding that he expected debts of customers to rise by 50 per cent, or £800m. Around 10 per cent of UK households are reportedly suffering from fuel poverty at the moment.
We've had a look at what goes into making up the total cost of this bill, alongside the gas and electricity itself.
Why are energy bills rising?
There was massive pressure on suppliers in 2021 as wholesale prices increased substantially, resulting in the UK's energy price cap rising by just under 50 per cent in April. Wholesale prices continue to soar after Russia, which is the world's largest natural gas exporter, invaded Ukraine in March. The UK gets little of its gas from Russia directly, but prices could still be driven up worldwide if Russian supplies to Europe were affected.
Energy providers have also been forced to shoulder the costs after 29 energy providers went bust in 2021, including Bulb Energy, which had 1.7 million customers. As millions of customers were absorbed by the remaining energy providers such as British Gas or EDF, the additional costs associated with the bailouts has been pushed onto existing customers' bills.
Why is my standing charge going up?
Families have taken to social media to complain that their standing charges are going up as well as the price per unit of energy. This means their bills have still risen even if they reduce how much energy they use.
The costs are soaring partly because because of the “supplier of last resort” scheme – every household is expected to pay the billions that have gone into rescuing customers from failed companies.
“Regulatory changes ordered by Ofgem were already set to add around £30 to each customer’s standing charge,” says Andrew Enzor, managing consultant at energy analysts Cornwall Insight. “Since then, there have been a wave of company failures, with each one requiring a bailout, the cost of which is being shared by all consumers."
How are my energy bills calculated?
Energy bills are made up of a number of costs:
Wholesale costs: The biggest cost of your bill is made up of the cost of the fuel itself. Wholesale prices have been steadily rising in since last August. Since energy suppliers tend to buy gas and electricity in advance, Ofgem determines the cost of buying energy from the market by tracking wholesale prices over a period of six months. So unless wholesale prices fall substantially over the summer, Ofgem's price cap will likely be increased again in October when it is next reviewed in August.
The prices on the wholesale market can go up and down very quickly and are determined by things like .what’s happening globally with fuels like gas, oil, coal and increasingly renewable fuels. Demand also affects price.
Network costs: The next largest chunk of the typical customer's bill, goes towards providing and running energy infrastructure, such as pylons and gas pipelines. Network companies charge your supplier an Ofgem-regulated price for their use of the energy network. This money goes towards maintaining, running and upgrading the networks.
Network charges also include the costs associated with switching customers away from failed suppliers, and on to ones that are still operational. Energy companies can claim 'any reasonable additional, otherwise unrecoverable, costs' when taking on customers from collapsed rivals – currently adding around £68 per year to an average energy bill.
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 obligations: Larger suppliers have to help pay for Government energy policies. These costs could cover schemes to support energy efficiency improvements in homes and businesses, help vulnerable people and encourage take-up of renewable technology.
Policy costs: Policy costs covers energy company obligation schemes, which pay to upgrade home insulation for households on low incomes; as well as renewables obligations, which require suppliers to get some of their electricity from renewable sources. Policy costs also cover the Warm Homes Discount scheme, which will pay vulnerable households £150 next winter, and the feed-in-tariff payments that owners of homes with solar panels get when they sell energy back to the National Grid.
Other direct costs: These cover costs for things like:
- Third-party services, such as sales commissions and brokerage
- Meter maintenance and installations
- Administration
- Wider smart metering programme costs
Supplier operating costs and margin: Operation costs cover things like customer service, billing and the general costs of running an energy business. Energy companies are also able to claim operating costs equating to around £220 of the annual average price-capped energy bill, up 10 per cent from last October.
The winter price cap previously allowed energy suppliers to claim £23 from each default energy tariff as profit, but under the new cap they will make more than £37 on an average energy bill. When suppliers set their prices they will try to cover their operating costs as well as make a profit. Margins are a supplier’s overall earnings before deducting interest, tax and other costs
VAT: The Government also takes 5 per cent of the typical energy bill in VAT, equating to £98 a year for the average household – up from £61 before April – or more than £2.1bn in total.
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