Where Your Energy Spend Goes

Have you ever wondered how suppliers decide what price to charge for the energy you use? Well, there are a variety of factors at play in how much you're charged per kWh.

The general factors in the mix are as follows:

Wholesale supply cost of purchasing the energy

This is the worldwide price of oil, coal and gas. This makes up the lion's share of your bill.

Distribution costs

This includes transport of energy, administration costs, overheads and so on.

Profit ambitions
The companies want to make a bit of money. As you might expect.

Prices set by competitors
Competition. Research by Ofgem says that almost all customers cite price as the main reason they switch supplier, and therefore suppliers know that less means more.

Over the last few years, increases in the cost of fuel worldwide, wholesale energy and environmental compliance have been driving forces in setting prices. As a result the average UK household has seen its bill more than double since 2004 (Ofgem, Household Energy Bills Explained, 2008).

The Breakdown

Now it's time for a chart with pretty colours. This shows the breakdown of gas and electricity bills in 2009*:

Typical household spend on Energy 2009

To give you a further impression of this breakdown, the average quarterly gas bill is £800, and for electricity it's £445**.

As mentioned above, wholesale supply cost is the big one here, and it makes up 74% of the gas and 69% of the electricity spend. These costs are on the rise due to the UK's increasing dependence on international gas markets. The UK is now a net importer of gas, whereas historically it has been more reliant on North Sea reserves. Though these still have a significant part to play, the UK also now pipes gas over from Norway, has developed further connections with Europe, and imports LNG (Liquefied Natural Gas) via tankers.

Distribution makes up 15% of each. It's worth mentioning that the government's environmental commitment plays a part here, as investing to renew the country's energy infrastructure and connecting more renewables is further pushing up network charges.

And then there's the cost of environmental programmes themselves. Considering they didn't even factor into bills ten years ago, they make up a small yet significant amount now - 8% for electricity and 3% for gas.

The main programmes are as follows:

* EU Emissions Trading Scheme is adding £24 per year to the average customer's electricity bill
* CERT (Carbon Emissions Reduction Target) is adding £45 annually to the average customer's combined gas and electricity bill
* CESP (Community Energy Saving Programme) is adding £3 a year to the average customer's combined gas and electricity bill
* The Renewables Obligation (RO) adds around £12 a year to the average customer's electricity bill

In addition to these costs, there's transmission (2% for gas, 3% for electricity), meter provision (2% and 1%), and a standard VAT charge of 5% for each.

*Source: Ofgem, Household Energy Bills Explained, 2009

**Based on average annual consumption figures of 20,5000 kWh for gas and 3,300 kWh for electricity. Excludes prompt payment discounts.

For more information on your energy spend visit http://www.confused.com/gas-electricity