Household Energy Bills Explained

Given the nature of such a drastic hike in the amounts that homeowners are paying for their energy, it is understandable that many customers are left wondering where all of the money from their bills ends up – and a recently-published report from industry-regulator OFGEM attempts answer these queries.

According to OFGEM, the vast majority of domestic energy bills – 63% of gas bills, and 54% of electricity bills – go directly toward the cost of the supply, profit margin and the purchase of wholesale energy itself. The rates from which energy suppliers purchase wholesale energy from the market is subject to supply and demand, and sometimes fluctuate accordingly. Some of the larger energy suppliers in the UK own and operate their own energy generators, and therefore benefit from having to import substantially less energy onto the national grid; however, all 17 suppliers in the UK do indeed take part in the purchase of wholesale energy and factor this into household bills correspondingly.

Indeed, just how much profit energy suppliers truly make off of their customers varies as a direct result of these rates; however, OFGEM's most recent figures indicate that the rolling average net margin for a typical, standard tariff dual fuel customer is approximately £40 – a figure that the regulator expects to increase by around £5 within the next three months.

The second greatest factor which dominates a customer's household bill is the charges of distribution – explained by OFGEM as the means in which energy suppliers utilise infrastructure in order to connect one's home to their energy generation facilities on the national grid. This rather expensive undertaking accounts for around 19% of one's gas bill, and 18% of one's electricity bill.

Transmission charges – which cover the cost of building, maintaining and operating high-risk transmission networks factor in at 2% of one's gas bills, and 5% of electricity bills. Likewise, VAT – which is paid directly to HM Customs by energy suppliers – accounts for a uniform 5% of both fuel bills.

On the other hand, environmental costs account for varying percentages where gas and electricity consumption are concerned. Government programmes geared at reducing the UK's carbon emissions and rabid energy consumption impose regulatory taxes on energy companies, and this accounts for 4% of a typical UK gas bill, and closer to around 10% of electricity bills.

Finally, the remaining percentages of both bills are filed under 'other' costs. This uncomfortably loose term tends to account for extra costs such as meter coverage, gas storage, balancing the electricity system and the funding of various social programmes such as the Warm Homes Discount.

The majority of energy customers are paying around £100 more for household bills than they were just one year ago – and, while the risk of falling into fuel poverty looms over many struggling households, it is vital that customers do what is in their best interest in order to receive manageable household energy bills. No one can escape the inevitable rise in energy costs, yet by comparing energy tariffs with Energylinx, customers are able to save up to £122.94 on their annual energy bills simply by switching suppliers.

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