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Blog: Where your gas & electricity bill money goes

Circular sign entitled energy bills with arrow pointing upwardsGas and electricity bills are set to rise this winter. But do you know where the money you pay goes? Kate Rose, head of gas and electricity at Confused.com, explains.

With Labour leader Ed Miliband promising gas and electricity price freezes and winter price rises looming, there has been a lot of talk about the cost of energy recently.

As head of gas and electricity at Confused.com, I decided to look at where our money goes when we pay our energy bills by using my own bill as an example.

I'm on an electricity only, Economy 7 tariff, and pay monthly by direct debit. I currently pay £68 a month, or £816 a year.

Gas & electricity bills: Where your money goes

According to information from the energy regulator Ofgem, this is where my cash is going:

Element

Description

% of my bill / cost

Wholesale energy, supply costs and profit margin

Wholesale energy: The cost of the gas or electricity. Your
energy supplier may buy this on the wholesale market or
have a contract with a generator. Some suppliers are also part of companies which generate their own energy.
Supply costs: The costs associated with running a retail
sales business including sales, billing etc.
58% / £473.28

Distribution charges

The cost of building, maintaining and operating the local gas pipes and electricity wires which deliver energy directly
to your home. Suppliers are charged for this and pass on these costs in
the price they charge you for energy.
16% / £130.56

Transmission charges

The cost of building, maintaining and operating the high pressure gas and high voltage transmission networks.
Transmission companies charge users of these networks and these costs trickle down to retail customers.
4% / £32.64

VAT

Value Added Tax 5% / £40.80

Environmental charges

Government programmes to save energy, reduce emissions and tackle climate change.
Includes the cost of social programmes like the Warm
Homes Discount scheme.
11% / £89.76

Other Costs

Extra costs covering installation and maintenance of meters, storing gas and balancing the electricity system. 5% / £40.80


Environmental charges

Government-mandated environmental charges are often cited by suppliers when they increase prices.

These include the Energy Company Obligation, designed to encourage gas and electricity suppliers to fund energy-efficiency improvements to the homes of less well-off customers.

For example, there's the Warm Homes Discount scheme which offers low-income households a £135 discount on their electricity bill.

There are also schemes to promote renewable energy projects to make the UK less reliant on oil and gas.

It is the cost of these programmes in particular that is rising: I'm currently paying approximately £89 per year towards these schemes.

However, it's been estimated that the average dual fuel (where your gas and electricity is supplied by the same firm) customer could see these costs rise by a further £100 a year by 2020.

Gas & electricity firms' profits

But how much am I paying to the so-called energy fat cats in profit?

Ofgem's information doesn't split out profit specifically, however the large suppliers do publish figures.

While some report not making a profit on domestic energy bills others do: of this latter group, the profit margin seems to be up to 5 per cent.

So if you calculate 5 per cent of my annual electricity bill, I'm paying £40.80 to my supplier per year in profit.  

This seems a lot less than I am led to believe by media reports, and is actually the same as I'm paying in VAT and less than half of what I'm paying towards environmental charges.

But at the same time, I'm not sure I believe it when suppliers say they are unable to take a cut in their profit margin to support lower bills for all.

Have you switched gas & electricity firm?

Another important issue is whether Ofgem has found the right balance between maintaining competition in the market while simplifying it enough to engage more people in switching.

Scarily, only 2 per cent of households switched gas and electricity supplier in the last quarter, which is significantly lower than in the past.

But remember: paying attention to our bills, reducing our usage and making sure we are on the cheapest tariff by switching regularly aren't just throwaway ideas.

They work and are things we can all do to ensure we stop paying over the odds for our gas and electricity.

Click the link and scroll to the bottom to read: A step-by-step guide to switching gas and electricity supplier

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Guest contributor

Confused.com staff writer

Content provided by a special guest contributor.

Read more guest articles here


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