Understanding your electricity bill

Before you jump on comparison site, it’s worth taking a minute to understand what actually makes up your electricity bill and if you’re looking to reduce costs, think about some things you can do yourself.

On the bill itself, there's MWh (megawatt hour) and kWh (kilowatt hour) charges to get your head around. You may also have a standing charge, or a monthly charge that some suppliers use. And then you need to figure whether a variable or fixed rate suits you best. Add to that night and day rates, then it’s no wonder energy bills were voted the most difficult to decipher of seven different types of household bills.*

To help you out, let’s dissect the typical electricity bill.

It’s made up of lots of charges like wholesale costs, network charges and VAT.

At NESO, our charge falls undernetwork costs. Part of these costs are for ‘balancing services’ which is what we do – balancing supply and demand second by second – and it accounts for around 2% of the average household electricity bill.

But the largest part of your bill is under wholesale costs. That’s what you pay for the energy bought to supply your home or business, and although the biggest slice, it accounts for only around a third of your bill.

These costs can go up and down as suppliers buy energy from electricity generators on the wholesale market. Supply and demand can affect prices, with lower demand and high electricity availability meaning lower prices. They rise when the opposite is the case.

Two other factors then account for just under 25% each of your bill – network costs, which is where NESO fits in as mentioned, and environmental and social obligation costs.

Network costs pay for the electricity cables that carry energy across the country into your home or business. Network companies charge your supplier an Ofgem-regulated price for their use of the network, and this goes towards maintaining, running and upgrading the networks.

Environmental and social obligation costs are paid to larger energy suppliers which have to help pay for government energy policies. These costs cover schemes such as to support energy efficiency improvements in homes and businesses, to help vulnerable people and encourage take-up of renewable technology.

Around 16% of your bill is for operating costs. When suppliers set their prices they have to cover their operating costs, things like customer service and billing, as well as make a profit. 

That leaves VAT, which is 5% for households and 20% for most businesses of the entire energy bill, and some other direct costs at around 2.4%. These cover costs for things like third-party services, such as sales commissions, brokers, meter maintenance, installations and wider smart metering programme costs.

As you can see, many elements of the bill are ‘fixed’ in that they’re outside what your pay for the actual electricity. 

Of course, switching energy supplier might save you money, depending on your circumstances and the type of tariff you’re on, but it’s worth understanding your bill to see what parts are in your control and which aren’t.

Something that is in your gift, is to adopt some simple habits that will reduce your electricity consumption. See my electricity consumption for tips on how to save electricity and help the environment too.

*Survey published by Energy Helpline in August 2020.