The price you pay on your bill is made up of several components and factors that you might have not noticed. Many business energy bills have been made simplified to lessen confusion by adding only the ‘essential’ details.
Little did you know, there are a number of constituent parts that—once their costs have been factored in—are represented into 2 very prominent elements that we are all quite familiar with:
- Unit Rate
- Standing Charge
Over the past decade, 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 and dissected into 4 more integral elements such as:
- Wholesale Costs
- Network Costs
- Environmental/Government Costs
- Supplier Operating Costs
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. But, 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—this leads to energy losses or ‘lost energy’. Thus, an assumption of the rate of losses will be made and added to the customer’s final electricity price. Otherwise, the energy lost won’t be metered and paid for.
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. The Imbalance Price is paid by generators and suppliers to compensate for the imbalance on the UK electricity grid. This is effectively a way to balance the system, and increase/decrease energy volume in the network. These charges are levied in the energy price and takes up around 0.2% of your energy 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
To be able to have electricity transmitted to your site, a network is needed–which requires money, of course, to ensure proper maintenance and management. Distribution networks are easily one of the main parts of the energy bill and charge at least 20% or 1.20p/kWh in the example rate we have used.
- Transmission costs – 0.10p/kWh
By contrast, Transmission represents 5.5% of your energy bill or 0.10p/kWh.
Transmission costs are estimated by suppliers. These charges cover the expenses needed for infrastructure for distributing/carrying energy from facilities that generate electricity through distribution lines of an energy supplier.
- 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 are obliged to source from renewable regenerations with an increased amount of electricity.
Renewables Obligation or RO is one of the longest running schemes in the UK, making it 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)
Contracts for Differences is technically designed to replace Renewables Obligation. But for now, 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 plays the same role by encouraging renewable energy. The only difference is 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. Metering costs (provision and meter reading, data handling responsibilities) and suppliers’ profits are also covered by Supplier Operating Costs.
These charges vary greatly on each individual supplier, depending 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 (if a business is in a specified sector that is eligible to join the scheme). These are 2 government taxes that are applicable to business energy:
The standard rate of VAT for business electricity is 20%, unless a business is qualified for a 5% reduced rate.
- Climate Change Levy
The Climate Change Levy (CCL) aims to encourage a more environmentally-responsible UK and combat climate change by reducing carbon and greenhouse gas emissions and pushing 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.
As a 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