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Dissecting the UK’s Business Electricity Bill

business electricity bill

Have you ever set eyes on a business electricity bill and felt shivers down your spine?

The price you pay on your business electricity bill is made up of several components. A lot of business energy bills have been simplified to lessen confusion.

Energy suppliers have took it upon themselves to include only the ‘essential’ details, of course.

There are 2 very prominent elements that you can find in your business electricity bill. Two of which are equally important,

Consequently, business electricity rates have increased by at least 45% due to rising wholesale market prices, government levies, and more. Businesses of all sizes that are in various sectors have experienced these price increases; there is no escape.

But, what exactly are these components that make up the price of our electricity? Below you will find a quick breakdown of electricity bills in the UK:

What’s in your electricity bill:

We are all aware that our electricity prices are levied against the kWh of energy we consume, and how many days our business energy provider has distributed us with their energy supply. But, what are the constituent parts that make up the price we pay? 

  • Wholesale cost or Raw Energy Cost
  • Unbilled Volumes or Losses
  • Transmission & Distribution
  • Levies and Taxes 
  • Metering Costs
  • Supplier’s Margin/Profit

What do these elements contribute?

The constituent parts of the electricity unit price can be broken down into 4 more integral elements such as:

  1. Wholesale Costs
  2. Network Costs
  3. Environmental/Government Costs
  4. Supplier Operating Costs

For example, take an implied cost of at least 15p/kWh for a unit of electricity to see the contribution of the elements listed above.

1. Wholesale Costs

Energy supply: 3.7p/kWh or 37.5% of the overall cost.

  • The raw energy – 3.3p/kWh

The cost of the raw commodity is the largest element of the electricity price. However, there is a possibility that it is less than the expected 37% of the total price or 3.7p/kWh in an energy rate of 15p/kWh.

  • Energy Losses – 0.2p/kWh

There are tendencies where a natural inefficiency occurs when electricity is transmitted through the networks, the generator, and all the way to customer meters.

Because of this, energy losses or ‘lost energy’ come into play.

Thus, the customer’s final electricity price will contain an assumption of the rate of losses. 

Usually, these losses make up at least 1.2% of the price, or 0.2p/kWh in the example we have used.

  • Imbalance costs – 0.02p/kWh

Electricity cannot be stored on a mass scale economically.

The electricity industry is balanced and settled every half-hour.

Generators and suppliers pay the imbalance price to compensate for the imbalance on the electricity grid.

This is an effective way to balance and increase/decrease energy volume in the network. In addition, these charges are levied in the energy price and takes up around 0.2% of your business electricity bill, or 0.02p/kWh.

2. Network Costs

Transporting the electricity to the meter: 2.30p/kWh or 20.8% of the total cost.

The cost of transporting electricity across the transmission networks and local distribution network is the second largest element of the electricity price.

  • Distribution costs – 1.20p/kWh

A network must be present to be able to transmit electricity to your site. This requires money, of course, to ensure maintenance and management.

Distribution networks are easily one of the main parts of the energy bill. It particularly charges at least 20% or 1.20p/kWh in the example rate we have used.

  • Transmission costs – 0.10p/kWh

Transmission represents 5.5% of your energy bill or 0.10p/kWh.

Suppliers mainly estimate transmission costs.

Consequently, these charges cover the expenses needed for distributing energy from facilities that generate electricity.

  • Balancing costs – 0.14p/kWh

Balancing the electricity system takes up 0.14p/kWh or 0.14% of the energy price.

3. Environmental/Government Initiatives Costs

Supporting government initiatives and programs: 28.7% of the price

A range of ‘green’ and environmentally-responsible initiatives powered by the government have been quite an integral part of the electricity price.

Surely enough, more environmental costs will be on their way soon. 

  • Renewables Obligation (RO)

Electricity suppliers source from renewable regenerations with an increased amount of electricity.

Renewables Obligation is one of the longest running schemes in the UK.

With this in mind, it became a regular contributory cause of impact on electricity bills. Its purpose is to financially support and reward generators that invest in renewable generation.

  • Contracts for Differences (CfDs)

Interestingly, contracts for Differences is designed to replace Renewables Obligation.

But, these 2 levies will overlap for quite a number of years, acting as an additional cost to electricity bills. CfDs aim to provide long-term prices for renewable-generated electricity and guarantee payment for any ‘differences’.

  • Electricity Energy Companies Obligation (ECO)

This scheme is to encourage suppliers to invest in projects that provide customer efficiency. 

  • Feed in Tariff (FiT)

Just like the previous schemes mentioned, Feed in Tariffs technically play the same role by encouraging renewable energy. Moreover, FiT rewards small scale generators.

  • A Government Funded Rebate 

4. Supplier Operating Costs

Delivering and supplying electricity to customers: 1.30p/kWh or 13% of the retail price.

This covers the operational costs faced by energy suppliers to deliver and supply their customers with energy.

Therefore, Supplier Operation Costs cover metering costs and suppliers’ profits.

However, these charges vary greatly on each individual supplier. It all depends on the services they provide, their flexibility as a firm, etc. 

5. Value-Added Tax (VAT) and Climate Change Levy (CCL)

The cost of Government taxes: 2.87p/kWh or 28.7% of the price

Businesses and non-domestic facilities are typically charged with a standard VAT rate and CCL.

These are 2 government taxes that are applicable to business energy:

  • VAT

The standard rate of VAT for business electricity is 20%, unless a business qualifies for a 5% reduced rate. 

  • Climate Change Levy

The Climate Change Levy (CCL) aims to encourage a more environmentally-responsible UK. Specifically to combat climate change by reducing carbon and greenhouse gas emissions.

In addition, the CCL also pushes businesses and other non-domestic consumers to use energy more efficiently.

The levy is charged on a per kWh basis, which encourages consumers to lessen their energy consumption.

It is currently (2020) charged at the p/kWh rate of 0.811 p/kwh.

Conclusion:

In conclusion, the price you pay for your energy is split between the elements below:

  • 37.5% = the generators
  • 28.7% = the government
  • 20.8% = the networks
  • 13% = energy suppliers

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