What Makes Up Your Business Electricity Bill?
What’s in it?
The price you pay on your bill is made up of several components:
- the price of raw energy (or wholesale cost)
- transportation expenses (or transmission & distribution)
- losses (or unbilled volumes)
- levies (or environmental and social obligation costs)
- metering costs (or supplier operating costs)
- the supplier’s margin (or profit)
What does it look like?
When all of these costs are considered, your electricity bill will invariably be represented by two components:
- Unit rate(s)
- A standing charge
As a result, your electricity bill is based on the number of kWh you consume (your unit rate(s)) as well as the number of days you are ‘on supply’ (your standing charge).
How much does each element contribute?
We can clearly see the contribution of each element if we use a notional cost of 10p/kWh for a unit of electricity. The components of the electricity unit price can be divided into four categories:
- Wholesale Costs
- Network Costs
- Environmental & Social Obligation Costs
- Supplier Operating Costs
1. Wholesale Costs
The cost of the energy supplied: 3.50p/kWh or 35% of the overall cost.
a) The raw energy cost – 3.4p/kWh
The cost of the raw commodity is undoubtedly the most expensive component of the electricity price, but it may be less than you would expect at 34% of the total price, or 3.4p/kWh in a headline energy rate of 10.0p/kWh.
b) Energy Losses in the network – 0.1p/kWh
As electricity travels from the generator to the customer metre, there is a natural inefficiency in which energy is lost along the way. As a result, unless an assumption of the rate of losses is made and this ‘unbilled volume’ is added to the final electricity price, this energy will never be’metered’ and paid for. In our example, losses account for approximately 1.1% of the price, or slightly more than 0.1p/kWh.
c) Imbalance costs – 0.01p/kWh
Because electricity cannot be economically stored on a large scale, the electricity industry is’settled’ or ‘balanced’ every half hour. Supply (generation) must meet demand (usage) instantly. This does not always occur, but such occurrences are felt far more frequently in a commercial sense than in a ‘blackout’ sense. The imbalance charges levied on the energy price subsidise this commercial sense. Effectively, it is an insurance payment to compensate generators and network operators for having to balance the system, that is, increase or decrease the volume of energy in the network. This compensatory payment amounts to approximately 0.1% of the energy bill, or 0.01p/kWh.
2. Network Costs
The cost of transporting the electricity to the meter: 2.29p/kWh or 23% of the total cost.
The second largest element is the cost of transportation of the electricity across both the transmission network and the local distribution network. This is made up of:
a) Distribution costs – 1.7p/kWh
It is the latter, the distribution network that costs the greater part of the transportation charges at 17% or 1.17p/kWh in our headline rate.
b) Transmission costs – 0.5p/kWh
Transmission by contrasts costs 5,2% or 0.5p/kWh. The supplier will pay the relevant regional distribution network for their services; these are now privately owned enterprises often with multiple regions under single ownership. These businesses are required to publish their tariffs so that suppliers can accurately forecast and charge the customer appropriately to cover their costs. The transmission costs are payable to a single entity, National Grid, and the costs are directly related to the length of the network the commodity travels through in order to reach the required entry point into the distribution network.
c) Balancing costs – 0.09p/kWh
The costs associated with balancing the overall electricity system add around 0.09p/kWh to the energy price or 0.9%.
3. Environmental & Social Obligation Costs
The cost of supporting various government initiatives through the energy price is 0.94 pence per kWh, or 9.4% of the price.
Government ‘green’ initiatives are becoming an increasingly important part of the electricity price, and we will soon be unable to count the number of different costs on one hand.
a) Renewables Obligation – 0.6p/kWh
The Renewables Obligation has the greatest impact on electricity prices; this payment is used to subsidise and reward generators who invest in renewable generation, and it contributes 6.1% to the price, or 0.6kWh in our example.
b) Contracts for Difference
Contracts for Difference (CfDs) will join RO in April 2015, ostensibly doing the same thing. These subsidies will overlap for a number of years, increasing the burden on the energy price.
c) Electricity Energy Companies Obligation – 0.25p/kWh
The Electricity Energy Companies Obligation or ECO is a scheme levied on suppliers to invest in customer efficiency projects such as subsidised loft insulation.
d) Feed in Tariff – 0.16p/kWh
The Feed In Tariff or FiT is another scheme to encourage renewable energy, this one rewarding small scale generators. FiT adds around 1.6% or nearly 0.16p/kWh to our average unit rate.
e) Higher Distribution Cost Levy – 0.1p/kWh
A different sort of levy, this time to support remote networks and subsidise the otherwise cost prohibitive activity of transporting electricity to those regions. Currently only focussed on the North of Scotland this charge is levied on all customers as part of the electricity price, making up 1.0% or 0.1p/kWh.
f) A Government Funded Rebate -0.18p/kWh
4. Supplier Operating Costs
The cost of delivering the supply to you, the customer, is 1.24 pence per kWh, or 12.4% of the retail price.
The supplier’s costs in delivering services to the customer, plus their profit, make up the final contribution to the electricity price. Metering costs include both the provision of the metre and the reading and data handling responsibilities.
The supplier appoints a third-party metering agency, which, like distribution companies, was once part of the wires and retail network but is now privately owned; sometimes they are part of the distribution network, sometimes they are independent.
The level of charges for their services varies depending on the metre type and technology used, and the supplier relies on these relationships to source reads from your metre and to ensure sufficient data is collected to facilitate accurate estimation when an actual reading is not available.
These costs, which cover the supply company’s operational costs such as cost of sales and profit, add another 12.4% or 1.2p/kWh to the final electricity price.
Using our example of a 10p/kWh price and an average customer consuming 30,000 kWh per year, this margin would equate to around £372 per customer per year to cover all supplier costs and any profit on a £3,000 bill.
Of course, any supplier who also owns generation assets has the potential to profit from this component as well.
5. VAT and Climate Change Levy
The cost of additional government taxes on the price of energy: 2.02 pence per kWh, or 20.2% of the price
Two additional government taxes apply to business energy costs:
a) VAT
Business electricity is subject to a VAT rate of 20%
b) Climate Change Levy
Climate Change Levy is applicable to all units used and is currently charged at a rate of 0.541p/kWh (2014/15).
The final tally
Taking everything into account, we can conclude that the proceeds from the energy price you pay are divided as follows:
- 35.1% going to the generators
- 29.7% going to the government
- 22.8% going to the networks, and
- 12.4% going to the energy supplier
The final tally
When all of these costs are considered, your electricity bill will invariably be represented by two components:
- Unit rate(s)
- A standing charge
As a result, your electricity bill is based on the number of kWh you consume (your unit rate(s)) as well as the number of days you are ‘on supply’ (your standing charge).
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