Why is my energy bill so expensive? What you are really paying for as price cap rises

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Energy bills have been rising more and more over the past year, with the energy cap rising, energy firms closing down and war in Ukraine forcing the government to reduce dependence on Russian gas.

The energy price cap is set to rise by 54% as of April 1, meaning a £700 rise is set to hit 22 million households, taking total bill to an average of £2,000. Energy watchdog Ofgem has found that energy prices are being driven by a record rise in global gas prices – which have quadrupled in the last year. As a result, 29 UK energy companies have either closed down or are in administration.

On April 1 2021 the energy price cap was £1,138 – meaning bills have increased by 76% in one year. But what are you really paying for? What are you getting for £2, 000 a year? This is how your energy bills break down.

Ofgem splits the costs of energy bills into wholesale costs, network costs, social and environmental obligations, other direct costs, supplier operating costs and margin and taxes.

MyLondon took an average dual-cost bill, where gas and electricity are calculated together in one bill, to find out how much of our bills go on what.

READ MORE: Mum saves over £80 on monthly heating bill using Martin Lewis’ easy money saving tip

Wholesale costs

Wholesale energy cost is the amount of money spent by an energy company on buying the gas and electricity needed to supply your home. This is the area which has grown the most this year and has put so many energy companies out of business.

According to Ofgem’s latest figures, wholesale costs make up 34.6% of a dual cost bill, which works out at £698 of the maximum £2,017 bill.

Network costs

These are for gas pipes and electricity cables that carry energy across the country and into your home. The companies that own these charge your energy supplier an Ofgem-regulated price for use of their energy network. This money goes towards maintaining, running and upgrading the networks. Network costs are the second-largest cost within your energy bill at 25.4 per cent or an average of £512.

Supplier operating and margin costs

This might sound complex but essentially means the general costs and profit from running a business. Costs such as those associated with customer service come under this, as well as billing.

The other part of this cost is the energy company’s profits – the amount above the pure cost of energy the company charges to ensure it does not go bankrupt. At 18.6% per cent, according to Ofgem’s latest figures, this will work out at around £375 per household from April 1.

Environmental and social obligation costs



Environmental costs include helping to fund renewable energy

Environmental and social costs are basically legal obligations for suppliers to contribute to government energy policy, such as helping to fund more renewable energy.

These make up 15.3 per cent or around £309 of the £2,017 price cap.

VAT

The cost of VAT is pretty self-explanatory. At 4.8 per cent, this is one of the smallest parts of your dual-energy bill and will cost £97 a year from April 1.

Other costs

This is the smallest part of your bill and essentially covers all other costs not mentioned above. It may include third-party services and the cost of upgrading homes to have smart meters fitted. At 2.2 per cent, it will be around £44.

As you can see your energy bill costs are not as straightforward as they might seem – and wholesale and network costs make up the majority of your bill. Concerns around costs continuing to spiral continue as the UK pledges to end dependence on Russian gas by the end of this year.

For the more bill-savvy amongst you, you may have noticed that the final price comes to £2,035 – £18 more than Ofgem’s own price cap. This is due to an error in Ofgem’s own data, where the overall percentage costs add up to 100.9% – more than 100%.

MyLondon has contacted Ofgem for comment and asked for clarification on this.

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