Energy bills: Where does my money go?

Energy saving light bulb with cash An energy bill is one of the biggest outgoings in any household budget

The "big six" energy firms now face a lengthy inquiry into whether their dominance prevents effective competition.

The decision comes after lots of political debate over the future of the industry.

Labour leader Ed Miliband pledged that gas and electricity bills will not go up for 20 months if Labour wins the 2015 election.

Then Prime Minister David Cameron made changes that cut the amount of green levies which, in turn, brought a reduction in consumers' bills.

Energy supplier SSE then said that it was bringing in its own price freeze until 2016.

So where exactly does customers' money go and what might be the effect of a price freeze?

How much do we pay?

The average annual dual-fuel bill - covering gas and electricity - is about £1,264 per household.

Bear in mind, this is an average. The amount you pay depends on your energy consumption and the method of payment.

It is one of the largest regular bills that a household has to pay, behind mortgage or rent, and council tax.

Do people in other countries pay more or less?

As with many aspects of this sector, the answer is not simple.

The Department of Energy and Climate Change has had a crack at a comparison, but data for countries including Belgium, Italy and Sweden is unavailable.

These figures show that average domestic electricity prices in the UK, including taxes, last year were the fourth lowest among 15 EU countries, and the fourth highest among the G7 group of nations.

For gas, domestic prices in the UK in 2012 were the second lowest among the 15 EU counties that were compared, and the third lowest in the G7.

Households in the US benefited from the lowest prices for both gas and electricity.

Domestic energy bills - international comparison

How much of my bill ends up as the energy firms' profits?

The argument over whether the major energy suppliers' profits are "excessive" is central to this debate.

The regulator has been collecting data on these firms' profit margins for the past three years.

The latest statistics, from mid-September, show that the average profit margin made on the £1,315 bill is £65. This was £30 higher than September 2011 and September 2012.

However, it is worth bearing in mind that this is a snapshot and the figure has been volatile. In some months, the profit margin has risen above £100, whereas in others the margin has been negative.

Ofgem says that seasonal factors are key to this volatility.

Where does the rest of the money go?

By far the biggest chunk of your bill goes on the cost of buying gas and electricity on the wholesale market, or directly from an electricity generator or gas supplier.

This, in addition to the costs of running a retail business with billing and sales, accounts for 67% of a gas bill and 58% of an electricity bill, according to Ofgem.

But this is where the figures get really complicated. Wholesale gas and electricity is not a single product but a whole series of contracts. Each company's team of traders will be buying energy at different prices, depending on whether this is delivered tomorrow, next month, or even in five years' time.

They spread out the purchases of energy to mitigate the risk of volatility when, for example, there is unrest in an oil-producing region.

Graphic comparing rise in energy bill and rise in wholesale energy price

OK, and what else does my bill cover?

About 16% of it goes on distribution charges - the cost of the gas pipes and electricity wires that get the energy into your home.

The cost of high pressure gas and high voltage transmission networks account for 2% of a gas bill and 4% of an electricity bill. VAT accounts for 5% of each.

A bit goes on costs of metering and storing gas. Then, 6% of a gas bill and 11% of an electricity bill went to government schemes aimed at saving energy, reducing emissions and tackling climate change.

It is these "green" fees that the energy suppliers say have pushed up the cost of a typical bill in recent years, but have now been reduced by the government.

What might be the effect of a price freeze?

Some of the energy companies, and those who represent them, argue that the lights could go out if prices cannot be changed for nearly two years.

In reality, we will not be plunged into darkness. What they mean is that the decommissioning of coal - and ultimately nuclear - power plants, is going to create a shortfall in energy production in the UK.

If they are going to build new power production plants, such as wind farms or power stations, huge amounts of investment are needed. An inability to set prices would affect this long-term strategy.

In response, Ed Miliband says that firms have been "overcharging" customers for many years. Consumer groups say a price freeze would be popular, but there would be hurdles in making such a policy work.

That is why a move by the companies themselves - which started with the freeze by SSE - would be welcomed by the Labour leader.

Graph showing rise in energy costs compared to rise in household income

Can the regulator step in if prices are pushed up ahead of the general election?

No, Ofgem has no control of the prices that companies charge their customers.

Instead, a supplier might find that it is undercut by other firms if it puts up prices significantly, leading customers to switch. If all firms do the same, this competition argument is weakened.

However, Ed Miliband says he would take action if prices went up sharply before the election, if Labour formed the next government.

What else might it mean for competition?

It could affect new, smaller businesses trying to get into the market. They would be unable to change prices, leading to more volatility in terms of profits.

Open4Energy, one of only a handful of new suppliers licensed by Ofgem, has already said that it would pull out of the UK if a price freeze looked like becoming policy.

How can I save money on my bill now?

There are various ways to save money on your energy bill, if you are a homeowner or a tenant.

They include looking for better deals and switching suppliers if needs be, especially if you have been on the same tariff for a long time.

Paying by direct debit, and receiving bills online can also reduce costs for those currently paying by cheque every quarter.

More on This Story

The BBC is not responsible for the content of external Internet sites

More Business stories

RSS

BBC Business Live

  1.  
    DEBT 11:14:
    FCA

    Debt management firms "must raise their game" says the Financial Conduct Authority (FCA). In a release this morning the regulator says many of the firms, which target people who have "often reached rock bottom", are failing to follow the new rules brought in in April to protect customers.

     
  2.  
    UNDER EMPLOYED? 10:43: Via Twitter

    Has deputy leader of the House of Commons, Tom Brake been on holiday? His tweeting of last week's unemployment figures today seems oddly timed: "The latest unemployment figures from the ONS have been released showing a fall by 146,000, lowering total unemployment count to 2.02 million". Keep up.

     
  3.  
    AIR FRANCE 10:30:
    Passengers wait at check-in counters during Air France one-week strike

    The head of Air France-KLM, Alexandre de Juniac, has given an interview to French newspaper Le Monde saying that he was prepared to suspend until December the rollout of the Transavia low-cost operation that sparked strike action by pilots. The strike has led to severe disruption in the past week. Air France flights have been reduced to 40% of normal service.

     
  4.  
    AIR FRANCE 10:13: Breaking News

    French national airline, Air France-KLM, has announced it is putting a halt to its low-cost airline expansion plans in an attempt to end the strike by pilots that entered its second week today

     
  5.  
    TESCO PROFITS 10:10:

    Barclays Capital analyst James Anstead says although there are few details at present as to why Tesco's profits need to be restated "there is a clear implication that Tesco's previous full year trading profit guidance of £2.4bn to £2.5bn needs to be reduced. He adds: "We cannot necessarily assume that the maximum change required is £250m."

     
  6.  
    ENTREPRENEURIAL SPIRIT 09:57:

    An 18-year-old "whizzkid" with a love for the board game Monopoly is preparing an audacious bid to lead one of UK's largest retailers, according to the Daily Mail. Harris Aslam already sits on the board of Nisa Retail. He has apparently has told the group's chairman he intends to stand for election as its next chief executive.

     
  7.  
    TESCO PROFITS 09:46:

    Marks and Spencer's chief financial officer (CFO) Alan Stewart was announced as the new CFO of Tesco in July but he is still on gardening leave and is not due to join Tesco until December. Laurie McIlwee resigned as CFO in April but continued in post until just over a week ago. Over the last week there has been no CFO in the Tesco head office, the company has confirmed.

     
  8.  
    TESCO PROFITS 09:39:

    Tesco says it has informed the financial regulator, the Financial Conduct Authority (FCA), about its investigation into the reporting of its profits.

     
  9.  
    TESCO PROFITS Via Twitter Adam Parsons Business Correspondent

    tweets: "Tesco won't confirm my revelation that Chris Bush has stepped aside. But will confirm that Robin Terrell is now doing his job!"

     
  10.  
    TESCO PROFITS 09:31:

    Tesco chairman Richard Broadbent says the retailer's investigation is focusing on the reporting of payments made to Tesco from its suppliers. It seems to be an issue of the timing of payments, rather than a "hole" in the accounts.

     
  11.  
    TESCO PROFITS 09:18:

    Dave Lewis, Tesco chief executive, will not confirm that Chris Bush the managing director is one of the four executives suspended as part of its investigation into its profits reporting. He is speaking to journalists on a conference call.

     
  12.  
    MARKET UPDATE 09:16:

    Aside from Tesco the FTSE 100 index is lower by 0.66% at 6,792 just over an hour into the trading day. Tesco is perhaps unsurprisingly the biggest faller. Meanwhile, engineering firm Petrofac is the biggest riser, up 1.72% to 1066p.

     
  13.  
    TESCO SHARES 09:11:

    Tesco's share price is beginning to stabilise a little. Having fallen 11.3% on the open to 203.5p, Tesco shares are currently trading 7.99% lower at 211.25p

     
  14.  
    TESCO PROFITS 09:01: BBC Radio 4

    James Bevan, chief investment officer at CCLA Investment Management, tells Today the profit warning from Tesco could amount to falsifying accounts. "They have decided to account for profits arising in future periods in the current period, and deferred costs that otherwise should have been recognised. That's really serious."

     
  15.  
    TESCO PROFITS 08:57: Via Email

    Richard Hunter, head of equities at Hargreaves Lansdown, says Tesco's profit warning "does not come close to jeopardising overall profitability" at the supermarket, and the market will be happy that at least the bad news is out in the open and being dealt with.

     
  16.  
    UK ECONOMY 08:44: BBC Breakfast
    Jeremy Cook

    Breakfast's Steph McGovern is down in London in the financial district talking to Jeremy Cook, chief economist at World First foreign exchange, who says we should be focusing on how strong the UK economy is following the Scottish referendum. Unemployment is down, GDP is growing - "all very very good news".

     
  17.  
    TESCO PROFITS Via Twitter

    Sean Farrell on the Guardian's City Desk tweets: "Tesco CEO Lewis: 'This is not in the ordinary course of events. This has been audited by a big reputable firm.'

     
  18.  
    HEADLINES
  19.  
    TESCO PROFITS 08:35: Radio 5 live

    Four senior Tesco executives including the UK managing director Chris Bush have been suspended, while an investigation into profits reporting is carried out, Adam Parsons says on Radio 5 live. The share price has recovered a bit but is still down more than 9%.

     
  20.  
    MINIMUM WAGE 08:21: Radio 5 live

    Shane Brennan from the Association of Convenience Stores says the minimum wage is becoming a "political football" between the main political parties, and warns a rise could hit employees negatively. "When the minimum wage goes up, small retailers cut back on the hours they offer staff," he tells Radio 5 live.

     
  21.  
    CHILD BENEFIT 08:18: Radio 5 live

    Ed Balls is talking about the minimum wage on 5 live Breakfast, but he keeps falling off the air. He was half way through explaining how the Labour party wants to extend the child benefit cap - one of those "difficult decisions" necessary to "balance the books".

     
  22.  
    TESCO SHARES 08:14:

    Tesco's shares opened down 11.3% at 203.5p - that's its lowest price since May 2003 - more than a decade ago.

     
  23.  
    TESCO SHARES 08:09: Breaking News

    Tesco's share price falls by more than 10% in the first few minutes of trading in London.

     
  24.  
    MOSS BROS PROFITS 08:04:

    Menswear retailer Moss Bros has reported a pre-tax profit of £1.95m for the six months to July. That's slightly lower than their previous guidance and reflects the number of stores that were closed for refit in the first half of this year, the company said. Like for like sales were 6.4% higher.

     
  25.  
    TESCO PROFITS Via Twitter Robert Peston Economics editor

    tweets: "Tesco! Oh my giddy aunt. Never thought it would come to this http://www.investegate.co.uk/tesco-plc--tsco-/rns/trading-update/201409220700142186S/ …

     
  26.  
    ALIBABA 07:55:
    Alibaba

    The Financial Times reports that Alibaba, the Chinese ecommerce group, has boosted the value of its IPO to $25bn (£15bn) by selling extra shares. That makes it the biggest IPO in history. Huge investor demand saw the company's share price surge 38% on its debut on the New York Stock Exchange on Friday.

     
  27.  
    TESCO PROFITS Via Twitter

    Richard Hunter from stockbrokers Hargreaves Lansdown tweets: "Profit warning on a profit warning for #Tesco likely to put further pressure on a share price already down 39% over the last year"

     
  28.  
    STOCK MARKET FLOAT 07:47:

    Other news from the stock market this morning: British bank Aldermore says it will float on the London Stock Exchange in October, aiming to raise £75m. Aldermore focuses on lending to small and medium-sized businesses and homeowners.

     
  29.  
    TESCO PROFITS Via Twitter Adam Parsons Business Correspondent

    tweets: "Dave Lewis initiated inquiry over weekend. Am told Philip Clarke has officially left Tesco, but remains available to talk to investigation."

     
  30.  
    PHONES 4U RESCUE 07:36:
    The Phones 4U shop sign.

    Phone network EE is to buy 58 Phones 4U stores - safeguarding 359 jobs - in a deal with administrator PricewaterhouseCoopers. The phone network was known to have entered negotiations over the weekend. On Friday Vodafone agreed to take over 140 Phones 4U shops.

     
  31.  
    TESCO PROFITS Via Twitter Adam Parsons Business Correspondent

    tweets: "Tesco were due to report Interims next week. That has now been cancelled."

     
  32.  
    LABOUR CONFERENCE 07:26: BBC Radio 4

    Labour shadow business secretary Chuka Umanna tells Today Labour is pro-business, but says: "What we have been clear about is we can't go back to business as usual and the kind of fast buck culture we saw in some parts of the economy that helped contribute to the 2008/09 crash."

     
  33.  
    TESCO PROFITS Via Twitter

    City grandee David Buik tweets: "It never rains but it pours dear old Tesco. It appears profits have been over-stated by £250 mn - shares could be down 5% at the opening."

     
  34.  
    TESCO PROFITS 07:15:
    A group of Tesco shopping trolleys

    "We have uncovered a serious issue and have responded accordingly," said Dave Lewis, who took over as the boss of Tesco last month. "The chairman and I have acted quickly to establish a comprehensive independent investigation. The board, my colleagues, our customers and I expect Tesco to operate with integrity and transparency and we will take decisive action as the results of the investigation become clear."

     
  35.  
    TESCO PROFITS 07:11: Breaking News

    Tesco has released a statement saying it over-stated its expected profit for the six months to 23 August. In a trading statement on 29 August it said it expected half-year profits to be £1.1bn. It has now revised this down by £250m.

     
  36.  
    LISTEN AGAIN Via Twitter Adam Parsons Business Correspondent

    tweets: The #WUTM podcast. All yours: bbc.co.uk/podcasts/serie…

     
  37.  
    AIR FRANCE 07:03:
    Air France planes

    Pilots at Air France are looking ahead to a second week on strike this morning. France's transport minister Alain Vidalies says the fate of Air France is at stake in the dispute. Pilots are angry that the airline is expanding its budget carrier, which pays pilots less.

     
  38.  
    LABOUR ANTI-BUSINESS? 06:55: BBC Radio 4

    Lord Jones tells Today that Labour has not given business the credit it deserves. "Without the wealth that business creates you have no public sector, you have no taxation, you don't have one job in the country. That's how important business is," he says.

     
  39.  
    LABOUR ANTI-BUSINESS? 06:51: BBC Radio 4
    Digby Jones

    Lord Digby Jones, former head of the CBI and member of the last Labour government tells Today that Labour is casting doubt on its support for the UK business community. "Whatever the current shadow cabinet say - let's nationalise the banks, let's have a social market in energy, lets increase business taxes, whatever it may be - they are showing by their actions that they actually don't get it," he says.

     
  40.  
    DEVOLUTION 06:42: Radio 5 live

    Wake Up to Money has been discussing the prospects for more devolution across the UK in the wake of the "No" vote in Scotland. Tony Travers from the London School of Economics says the UK is one of the most centralised democracies in the world - 95% of tax revenues go straight to the exchequer.

     
  41.  
    MINIMUM WAGE 06:35: BBC Radio 4

    Is Labour leader Ed Miliband's pledge to raise the minimum wage to £8 per hour by 2020 anti-business?Simon Walker, head of the Institute of Directors, tells the Today programme he shares many of the Labour party's concerns - on energy prices, zero-hours contracts and wages. "But... we don't agree with Labour's instinct to legislate or regulate on these matters," he says.

     
  42.  
    MARKETS 06:29: BBC Breakfast
    Breakfast

    Breakfast's Steph McGovern is in the City in London before dawn this morning, talking to analysts and market traders about what's moving the markets after the "No" vote in Scotland last week. She'll be talking to a currency trader later to find out what's going to happen to the pound.

     
  43.  
    MINIMUM WAGE 06:18:

    Labour's leader Ed Miliband says Labour will put the minimum wage up to £8 an hour if they win the election next year - up from the £6.50 is due to rise to this October. The unions say that's not enough, and want £10 an hour, while the CBI warns any rise will "put jobs at risk".

     
  44.  
    LABOUR CONFERENCE 06:12:
    Labour shadow  chancellor Ed Balls

    Ed Balls is expected to say that Labour will reinstate the 50 top rate of tax in his speech to the party conference later today. That's not necessarily news. But Labour haven't been completely clear on whether they would reinstate the 50p tax band until now. The inclusion of the proposal essentially amounts to an election promise eight months out from the general election.

     
  45.  
    Phones 4U 06:02: Radio 5 live

    EE has confirmed it's looking into buy a few of those Phones 4 U shops now on the market. Judy Palmer from Begbies Traynor defends EE and Vodafone, the operators accused of helping to put the mobile retailer out of business, on Wake Up to Money calling their actions "commercial hardball".

     
  46.  
    06:01: Edwin Lane Business reporter, BBC News

    Hello all. We're also getting the latest on the fate of Phones 4U, after it went into administration last week. Get in touch with us on bizlivepage@bbc.co.uk or tweet us @BBCBusiness.

     
  47.  
    0600: Matthew West Business Reporter

    Morning folks. We start the day with news that luxury shoe brand Jimmy Choo is looking at a stock market float in London, there are also half year results from Moss Bros. The Labour party conference goes into its second full day with a speech from shadow chancellor Ed Balls. It's his last conference speech before the election so we'll bring you any nuggets from that too. Stay with us.

     

Features

  • An ant and a humanAnts v humans

    Do all the world's ants really weigh as much as all the humans?


  • Tattooed person using tabletRogue ink

    People who lost their jobs because of their tattoos


  • Indian coupleSuspicious spouses

    Is your sweetheart playing away? Call Delhi's wedding detective


  • Civilians who had been hiding inside during gun battles manage to flee  from the Westgate Mall in Nairobi, Kenya Saturday, 21 September 2013Westgate's questions

    One year on, Kenyans await answers about the mall attack


From BBC Capital

Programmes

  • StudentsClick Watch

    Could a new social network help tailor lessons to students’ needs and spot when they fall behind?

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.